Time to buy CDs?
With the recent increase in interest rates by the Federal Reserve, bank CD rates have risen dramatically. CDs just a few months ago offering less than 1% rates are now offering as much as 4% per year.
Strangely enough, because of the action by the Fed and its effect on short-term rates, a five and even 10-year term CD is paying approximately the same as a 1-year CD: about 4%. Therefore, we get no higher rate for locking in our money for 10 years vs. just one year.
The television commentators are breathlessly announcing its time to buy CDs. However, another commentator reports, and history confirms, that after the Fed stops raising rates, the stock market historically jumps 20% in the next 12 months. Which sounds better?
Meanwhile, for many of our clients with available fixed income funds, we are finding attractive bond securities paying approximately 6% fixed rates.
With interest rates higher on CDs, bonds, and other fixed income, it is tempting to invest excess cash in a portfolio toward more bonds, and even consider selling some stocks for that piece-of-mind 6%.
However, the opposite strategy is normally best: When stocks go down, we normally want to buy what is likely to increase the most in the future, and there is no better time to buy stocks than when stock prices are depressed. In the industry lingo, this is called re-balancing the portfolio.