Why Every Investor Should Consider CDs in Their Portfolio

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CDs are stable assets that appreciate without input, making them worth a second look. Read on to learn more. [[{“value”:”

These days, we have more access to information to help guide our investing decisions than ever before. There are a wide range of places to park our money. Cryptocurrencies are dramatic, stocks can be solid dividend payers, and even savings accounts are paying out a lot more than they used to.

So why would you ever choose a certificate of deposit (CD) out of all the options you have?

Certificate of deposits aren’t sexy

If you ever read my commentary at Fool.com, you already know that I am an enormous fan of the unsexy stocks. I love investments that don’t get my heart pounding, that don’t end up in the news every day, that don’t even create a blip on most people’s radars. I love unsexy stocks, but I also love other unsexy investments.

And you know, when it comes to unsexy investments, CDs are it. They’re the trash collection companies of the savings world. You put money in, money comes out at some point down the road, depending on the length of your CD term. When the federal funds rate is high like it is right now, CDs are one of your better choices.

Four advantages of CDs

The advantages of CDs are abundant, and include the following.

1. You’ll get a guaranteed pay-out at the end of your term

There’s no guesswork. You don’t have to wonder if the market will shift, changing the value of your investment. You put your money in, you’re promised a 5% CD interest rate, and at the end, you get your money back, plus a 5% return rate. It’s really that easy.

2. Your money is locked in, so you’re incentivized to not spend it

For a lot of people, saving is hard because the temptation to use that money can become overwhelming the more they manage to amass. After all, it’s only $500 against your $5,000 savings account, what harm is there? Oh, and this is only $100 against your (now) $4,500 savings account…and repeat this until you’re suddenly out of money. CDs lock your money in at your bank, where you’re encouraged to leave it alone to maturity. If you don’t, you’ll pay a penalty.

3. It takes very little to open a CD in a lot of cases

The minimum CD value at any given bank can be pretty different, but if you’re not hoping to hold your CD at a particular bank, you can find CDs with minimum deposits as low as $0 with products like the Barclays Online CD. That means if you’ve got $100 or you’ve got $10,000, you can open a CD somewhere (Barclays pays 5% APY for a 1-year CD, so you still get a nice rate of return, too).

4. CDs are truly passive investments

I deal a lot in the Exciting World of Real Estate (™), where buying portfolios of rental properties is considered to be “passive income.” There’s no way on this Earth that rental properties, or other physical real estate (REITs notwithstanding) are passive investments. You’re out there all the time helping tenants with problems, making repairs, finding new tenants, looking for new units, and so on. It’s about as anti-passive as you can get.

But a CD is nothing like that. It’s “park your money and go off and do whatever” level of passive. You have just one time per cycle that you have to even care about your CD, and that’s at maturity, when you either take your money or reinvest it in another CD. That’s the entire decision. The rest of the time, the money just sits there, growing like a financial fungus in the back of your refrigerator.

Every investor should consider CDs in their portfolio

No matter what kind of investor you are, a certain percentage of your portfolio should be entirely safe, no-lose investments. CDs can balance your risk against, say, crypto or investments you’ve made in tech startups.

But even if you don’t get into really dangerous waters with your money, CDs can still be useful tools. Because of the forced savings aspect of them, your money is locked away, safe from you, during the initial urge-to-spend period. You can’t spend what you can’t touch, and for many people, that can be a huge advantage and a way to get started with a solid rainy day fund.

When you get your tax refund, for example, putting $500 or $1,000 in a CD that’ll mature in six months or a year can not only generate a bit of a return but also stop you from frenzy buying. (This is not a judgmental statement — I gobble up Black Friday sales like Pac-Man eats dots.)

No matter how experienced an investor you are, there’s room for CDs in your portfolio. CDs are almost entirely upside. That’s it. The end.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Kristi Waterworth has no position in any of the stocks mentioned. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.

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