Certificate of Deposits at the Bank as an Investment
The purpose here is to answer the question “are bank CDs good investments”? Further, what about CDs vs. Stocks. When I was a stock broker one of the most common ways to hook a new client was asking them what return their CDs were earning at the bank. When they told me, I would give them a disappointed expression, pause and then say, I think we can do better than that. But that was long ago and not something I am proud of. CDs are good investments. Give me a chance to redeem myself and explain why.
One of my clients only bought bank CDs. He had a lot more money than most of my other wealthy investors. I asked him why he did not invest in the stock market. His reply was simple. Stocks are indirect investing. That is, you take part in capitalism though a distant form of ownership. You have little influence over the company and the profits you make are very dilute and mediocre, maybe 10% a year. It is better you stash your cash in something safe like a near-cash fixed income investment like a CD or Muni bonds. Next, focus your energies on applying your own creative talent and extra capital on your own business. Rather than getting distracted by the gyrations of the stock market.
When I did taxes and was a broker most of my clients did not make their fortune trading stocks but rather started small companies. This is the reality. Granted a difference of 5% return on a fixed income investment and a 10% return in the stock market over time is a big difference if you consider compounding. However, the point is you should invest in your own company first. Passive indirect investing, even if you are a trader is the optimal way to get rich. Investing in your own ideas and talents are better. That being said I am an active investor in the market, but it is not my primary source of income.
Fixed income vs. equities
If you are a conservative investor you might want to take your age and subtract it by 100 and this is the percentage you should be invested in fixed income like bank CDs. You can shop around for the highest rates or just go to your local bank or credit union and buy a few at laddered maturities. You will not get rich with CDs. However, I live in Europe and America and I have seen some really good rates up to 11% on Bank CDs when new banks are trying to get started and raise capital. These are insured and it is a little like international arbitrage. This is better than an average annual return on the stock market.
I personally do not own one CD right now. Money markets pay close to CD rates and I am active in the equity markets. Therefore, I split my asset allocation between cash and equities leaving CDs (fixed income) out. I do this because I follow a pretty disciplined systematic approach to investing and it does not take a lot of my time, or mental energy to implement.
CDs are a good investment
Invest in a bank Certificate of deposit if you:
- Are an entrepreneur and do not have the time to be a stock trader.
- You are saving for something like a house or a major purchase and do not have the luxury of a twenty-year time horizon to smooth out your equity returns.
- You are a conservative person and fixed income investing in a simple for is for you and provides income.
CDs are not a good investment:
Do not bother with these types of additions to your bank account if:
- You are very patient and have the stomach for the ups and downs of the stock market and are open to various methods of investing including international investing and leverage.
- You know how to find fixed income investments that are low risk in a diversified portfolio with a greater yield than a bank certificate, but it’s not too time-consuming.
- You are young and not going to retire anytime soon.