Certificates of Deposit (CDs) are often considered a “low risk” investment. Depending upon the type of CD, they can offer a guaranteed rate of return, no fluctuation in value and federal deposit insurance up to $250,000, per insured bank, for each account ownership category.
Unfortunately, CDs have a very rarely mentioned downside that may make them high risk for some investors: loss of purchasing power.
Investors need to be aware that, historically, CDs have not keep up with inflation and taxes over medium to long periods of time. Long-term investments in CDs lost purchasing power as a result.
That may not be a problem if CDs are a small part of a diverse portfolio or a less liquid part of an emergency fund. However, investors who use CDs (and money market funds and savings accounts) for a large percentage of their investments may be in for a shock when they begin to spend those funds.
The table and graph below illustrate the decline in purchasing power for CDs over a 12-year period. After subtracting taxes and inflation, CDs lost purchasing power ten out of the twelve years. The total decline in purchasing power over 12 years was 10%.
Question: Does this situation seem “safe?”
More information: There are many types of CDs. This blog post refers to fixed rate CDs issued by banks and credit unions. Information on CDs from the Federal Deposit Insurance Corporation is here.
This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time.
Any information provided in this presentation has been prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.
Keep in mind that:
- Past performance is no guarantee of future performance;
- Investments involve the risk of loss of principal and earnings;
- ETFs, mutual funds, including money market funds, etc. are not guaranteed in any way by the US Government, the FDIC, a bank or anyone else.
- “Average annual return” evens out variations in the actual year-to-year returns.
- ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
- None of the information provided by Arthur Stein is necessarily relevant to anyone’s particular situation. Situations differ among individuals and you should not assume that these generalizations or information apply to you.
- Investments mentioned may not be suitable for all investors.
- Arthur Stein Financial, LLC is registered with the states of MD, DC and VA. It is not registered with, nor is it required to be registered with, the Securities and Exchange Commission.