Bank CDs
Making Comeback
Amid Market Volatility
by Robert Heady, editor
Bank Rate Monitor
Guess
what's almost back in vogue?
The little old, homely
bank CD.
That's right. The sudden
instabilities of the marketplace sagging stock markets, Mideast
turmoil, rising oil prices, weak corporate earnings and the election
are pushing bank certificates of deposits into the limelight
once again.
The picture looks like
this: The Dow Jones average, the Nasdaq composite, S&P 500,
Russell 2000 and Wilshire 500 indexes are all off by as much
as 22 percent for the year, but you can still earn up to 7.6
percent from a federally insured bank CD guaranteed. Your account
will be insured for up to $100,000 by Uncle Sam, so you can't
lose a dime no matter how wildly the winds are blowing on Wall
Street.
(It's a far cry from
watching Amazon.com and Yahoo stocks take heart-stopping 15 percent
and 12 percent plunges, respectively, in one day.)
Besides bank CDs, there
are two other supersafe, secure routes to go Treasuries and U.S.
Savings Bonds where your investments are also protected by the
full faith and credit of the federal government.
I know. You're probably
asking yourself, "Who wants to fool around with those sexless,
bummer bank CDs when I've been earning 20 percent to 25 percent
with my stocks?"
Fine. But that was
yesterday. Those numbers are now out the window; the bloom
is off the rose, and now you must figure where your money can
grow instead of disappear. In other words, it may be time to
diversify your portfolio, according to some analysts who believe
the market could continue to slip in 2001.
Experts also think
that CD rates, many of which were at a five-year high before
they began dipping slightly two weeks ago, could be headed downward.
Reason: Some banks have detected a fall-off in loan volume, and
when that happens, banks stop raising rates to attract money
and instead move their CD numbers down. In that case, best you
lock up the highest-paying CD yields now, vs. waiting until next
year when rates are lower.
Consider this: if you
had sunk $10,000 into the average Nasdaq stock last Dec. 31,
you would have lost $2,102 to date. With the Dow, you'd be off
$1,224. by contrast, the same 10 grand invested in today's top-paying
five-year CD would earn $760 per year; a 2.5-year account would
get you up to $748 a year, and a one-year account $735.
For listings of the
highest nationwide, insured yields, consult the latest rate tables
in your newspaper, or click onto www.bankrate.com.
Another good investment strategy is to investigate Treasury securities and U.S. Savings Bonds. They're much more complicated than bank CDs, but you can get an easy, fast education at the U.S. Bureau of Public Debt's Web site at www.savingsbonds.gov, including how and where to invest. For example, there's something call an "I Bond" that recently has been paying 7.49 percent the yield changes every six months based on the rate of inflation.
A huge plus is that Treasury Bills notes and bonds, and U.S. Savings Bonds are exempt from state and local taxes, plus, federal tax is deferred until you cash out or interest stops accruing after 30 years. Minimum investment is only $50 and the interest is added monthly, but if you cash out before five years are up there's a three-month earnings penalty.
Meanwhile, you'd be smart to fire any bank that's been offering paltry 2 percent and 3 percent yields on your savings. Shop for a free checking account, keep emergency cash in a high-yielding (such as 6 percent) Money Market Account, switch your credit cards to a low-rate outfit, and/or take out a home-equity loan to pay off debts and be able to write off the interest on your taxes.
Whatever your move, one thing for sure: The days of earning 25 percent a year on a typical stock investment are over for now, and you must reset your game plan accordingly.
Editor's Note: Robert K. Heady is the founding publisher of Bank Rate Monitor and is co-author of the book, "The Complete Idiot's Guide To Managing Your Money." You can e-mail him at jrnl8888@aol.com.
