When analyzing historical CD rates, it is interesting to see what hindsight conclusions we can make. Our data only goes back to 1993, but the data should reflect our current economic models better (or at least the inflation hawks we’ve been "blessed" with). Our historical CD rate information is current as of December 31, 2006.
First, many people just like investing in short-term CDs. Investing in 6-month CDs would have returned an average rate of 4.367%. If you opted for 1-year CDs then the average rate would have been 4.769%. At this point, 6-month rates and 1-year rates are quite a bit above the historical averages. Currently we are seeing rates around 5.30% to 5.40%. Rates from 1994 to 2000 and 2006 were above the averages. Rates from 1993 and 2001 to 2005 were below.
You would have fared much better if you invested with a longer-term perspective. Historical CD rates for 3-year CDs have been 5.071%, 4-year CDs have been 5.170%, and 5-year CDs have been 5.383%. That is up to a full percentage point difference. This actually makes a lot of sense. Banks and Credit Unions typically offer better rates for longer-term CDs because the investor is taking more risk that the economy will move against them.
Currently, Banks and Credit Unions are faced with an inverted yield curve. This means the short-term treasuries have a higher yield than the longer-term. Historically, a drop in rates has followed an inverted yield curve. As a result, Banks and Credit Unions are anticipating this drop and don’t want to offer too high of a rate for the long-term CDs.
If you have a nice laddered portfolio already created, I would stick with it. If you don’t, now is a great time to create one. However, history doesn’t always repeat itself; it may be prudent to keep a balanced approach to your CD investing.
Chris Duncan is a NASD Registered Representative. He specializes in helping clients find the best and highest CD rates nationwide. His clients include individuals, financial institutions, corporations, and public agencies. Visit us at http://www.jumbocdinvestments.com
» left by Anonymous (2 years 237 days ago.)
Sit down with a investment specialist. CD's (certificates of depreciation..ha ha) could hurt your estate long term. There are plenty of other investments that will protect you from the volitile market, but still allow you to participate in the growth. That term "jumbo CD" makes me nauseous. Respond to this comment
» left by Chris Duncan(460) Chris Duncan (2 years 237 days ago.)
The ups and downs of the market make me nauseous. CDs are not geared to younger people that have plenty of time to sit and wait. They are geared to folks facing retirement who want an income they can depend on and have their principal protected. Respond to this comment
» left by Kurtis from Houston (2 years 236 days ago.)
Many variable annuities will guaranty your principal plus give you a minimum interest rate of around 5% with no cap on what the market does. Also allowing you to withdraw up to a certain percentage (up to 15%) annually with no fees.
I personally know that Metlife has an annuity through Primerica that will guaranty 5% credited to your account for 10 years with no cap on the market, then turn around and guaranty you a minimum 5% withdraw (of principle plus compounded interest) for 20 years (even if the market goes belly up) without even annuitizing.
So lets say you invest $100,000. For 10 years the market does bad, you still get 5% compounded annually. If the market does great and produces 10%, you'd get 10%. Either way you are guaranteed a minimum of $169,889.
Now you decide to retire, you are guaranted a 5% withdraw annually for 20 years with no cap on the market. So if the market stinks, you still get your money, if the market grows, then you get 5% of what it grows to guaranteed for 20 years. So if on your anniversary date (when you started the policy) your value grew to $200,000 or say $300,000, you would be guarenteed 5% of that amount for 20 years, even if the market tanked after that.
There are plenty of great alternatives to CD's. I like what the first commentor called them! Respond to this comment
» left by Chris Duncan(460) Chris Duncan (2 years 235 days ago.)
First, on the 5% for 10yrs, I calculate $162,889 (compounded annually). My experience with insurance products is people either love them or hate them. I guess the same as CDs. :O) We have clients that do both and we have clients that said if you start selling annuities, color me gone. (Note: We don't sell annuities).
Also, an annuity or contract such as you mentioned above is only as good as the insurance company. FDIC insured CDs are insured by the Fed Gov't up to $100,000 at each institution. Of course, that may not give everyone the warm fuzzy's.
Moreover, as I understand annuities or contracts, there can be very large surrender charges. General rule of thumb with any investment, the higher the rate, the higher the risk.
Finally, locking up funds for 10 - 20 years may not be prudent for everyone.
» left by Kurtis from Houston (2 years 234 days ago.)
Thanks for correcting the $162,889, I must have hit a bad button somewhere in there. Some people do have a bad taste from annuities, and they have every right to in most cases, but the industry has really been working to fix this.
Right now people may have a little more faith in a large company like MetLife than our government :-)
The annuity I referenced does have a surrender charge for the frst 7 years (7%,6%,5%,3%,3%,2%,1%), but you can still pull out 100% growth and/or 5% from day one, so you ar not locking up your funds for 10-20 years. I thought CD's had large surrender charges as well?
» left by Chris Duncan(460) Chris Duncan (2 years 234 days ago.)
I'm enjoying this as well. I've written 5 articles and this is the first one that has generated some friendly banter.
Yes, CDs have a surrender charge as well and the banks call it an Early Withdrawal Penalty. They range from 90-Days of lost interest up to all interest. A true brokered CD, which we don't delve into too often with our services can be higher or even on the profit side depending on where the market is, if you have to cash out.
Many banks do offer the ability to draw out the accrued interest without penalty if your need isn't so great that you need to close the CD completely.
We recommend folks ladder the portfolio to account for perceived needs and keep part of the funds liquid.
Sounds like the annuity referenced above is similar to a bank allowing you to pull out accrued interest. Is that correct? But, if you have to close it during the first year, you will pay a 7% penalty and the penalty tapers the longer you have it. As long as those penalties are clear, I have no problem with them. I'm guessing the bad taste comes from the penalties not being fully disclosed (in the eyes of the purchaser). :O) Respond to this comment
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