Why You Should Consider CDs for Your Investment Portfolio
June 18, 2018
Colin O'Shea • Securities Analyst
Investing for growth may, in general, help you get to your goals, yet growth alone may not be all you need from your investing strategy. Owning investments that can protect your principal and generate some interest income may help balance the risk of holding growth investments, such as stocks. And that's why certificates of deposit (CDs) are something you might want to consider.
What is a Certificate of Deposit (CD)?
A Little Background
CDs typically are issued by banks or other financial institutions at terms ranging from a few months to several years. Generally, the longer the term, the higher the CD's interest rate. At the end of the term, your principal and any accrued but unpaid interest is returned to you. Or you can have your money automatically roll over to a new CD at the interest rate that's in effect at that time.
The Penalty Phase
When you open a CD, you agree to let the bank or other issuer use your money for a certain period of time. In return, you receive interest on your deposit, generally at a fixed rate -- so you'll typically know the amount you'll receive when the term ends. But what if you need your money sooner? You can cash in your CD before maturity, but you'll pay an early withdrawal penalty for doing so -- anywhere from one month's to a couple of years' worth of interest.
Several types of CDs are available and have different features, risks, and potential benefits. Before you invest, check around. Rates may be tied to a minimum investment amount and/or term length. Make sure you know the penalty for early withdrawal and factor that into your decision.
Also consider other potential risks. For example, with certain CDs, you could lose money if you liquidate the CD before maturity. Some CDs are callable by the issuing bank. And there's also the potential for losing purchasing power due to inflation or, should the bank fail, even your entire investment. However, CDs offered by banks and credit unions may be insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, up to specified limits (currently $250,000 per depositor per bank).
Want to Learn More About CDs?
For more information, see "Certificates of Deposit" on the SNB Savings Account page, or contact us if you have questions.