Nathan Bacal Financial

Certificates of deposits are the ultimate in safe investments. Or are they? Yes, they do provide a guaranteed rate of return. But what if the money you invested in a CD was instead placed in an investment vehicle that had a far higher rate of return? Doesn’t the money you didn’t make because you had your dollars in a low-returning CD count as risk?

That’s the debate that centers around CDs. Many more conservative investors like these vehicles because they know that they will see their money grow, guaranteed. But others point to the relatively low interest rates that they pay and say that CDs are little better than investing money in a bank savings account.

CDs are uncomplicated. They have a definite term – often two years or five years. And they pay interest. How much interest varies, but Bankrate.com, a leading financial Web site, said that as of mid-April that the average five-year CD was paying interest of 2.85 percent. The average one-year CD was paying interest of 1.35 percent.

These rates vary according to market conditions, but they generally stay in that range. As you can see, these aren’t exactly stellar rates of return. Investors who put their dollars in CDs, then, will see their money grow. They just won’t see it grow by much.

If these same investors put their money in mutual funds, they have the opportunity to see their dollars increase at a significantly higher rate. Of course, they also face the risk that their investment will lose money. No mutual fund, no matter how well it’s performed in the past, is guaranteed to increase in value. Remember, history is not a reliable indicator of future performance.

The key, then, is for investors to determine how much risk they are comfortable with. If you’re young, and your retirement years are far in the future, you should invest more of your dollars in higher-risk, higher-reward investment vehicles, places like the stock market. As you move closer to retirement, it’s time to switch some of your money into safer ventures such as bonds. And as you get even closer to retirement, you might consider taking out a variable or fixed annuity. You might consider, too, putting some of your money into a CD.

CDs, like all investment types, have their pros and cons. There is no one investment vehicle out there that is perfect for every situation. CDs, then, have their place. It’s just up to investors to determine how much of their money they want to tie up in CDs and for how long.