CDs are Better Than Bonds For Short-Term Investments

Certificate of Deposit yields are low, very low.  For locking up your money for 5 years, you will receive less than 2.0%.  It almost doesn’t seem worth it.  However, its important to understand that investing is about getting the best returns relative to the level of risk you are taking.

If the stock market lost 10% of its value, would you be happy if the stock fund you invested in had a return of negative 1.0%?  The answer should be yes.   While your return would have been negative, and nobody likes losing money, your return would be 9% better than most stock investors.

Certificates of deposits (CDs) are one of the safest instruments in the world. Its important to remember that they are guaranteed by the FDIC, a US government agency and almost as safe as Treasury Bonds. However, they don’t yield anything like treasuries.  The blue line below is the yield on highest paying CDs that we could find. The red line is the yield on Treasury.

Do you notice anything?

CDs pay about 1.0% more yield than treasuries of comparable maturity!

While the difference between treasury and CD yields increases over time, the amount of the increase becomes less meaningful after one year. The highest yielding 1 year CD pays 1.1% or 0.92% more than a similar treasury.

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Marc Prosser

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