Do Not Lock Yourself Into A Long Term CD

Interest rates in America are rising, and they may very well continue to rise throughout the year. Because of this current trend in the financial market, investors should reduce their exposure to long term CDs to ensure that they receive best CD rates available. 

The national average rate for a five-year certificate of deposit has been hovering around 1.50% (at the time this article was written). If an investor purchases a five-year CD and rates begin to increase, he or she will be locked into a lower interest rate while new investors receive the higher rate of return. Withdrawing from a long-term certificate of deposit may require the investor to forfeit interest earned or pay a penalty. If an investor believes that interest rates are poised to rise, then that investor may be wise to wait before locking in to a long term certificates of deposit in order to receive the best CD rates later. 

One way for an investor to combat the potential of rising interest rates is to invest in shorter term certificates of deposit. For example, the national average rate for a three-year certificate of deposit is 0.99% (at the time this article was written), and the national average rate of return on a six month CD is 0.30%. While these are not high rates of return, they allow the investor to be able to move to a higher earning CD if one becomes available. Another method for investors to combat rising interest rates is to ladder their certificates of deposit. With this popular investment strategy, investors purchase short term certificates of deposit and then reinvest the proceeds into longer term CDs after the original ones mature. Every year, the investor would purchase a five year CD, for example, with a portion of the capital that matured. As new CDs mature each year, the investor continues purchasing new five-year CDs eventually having CDs staggered at one year intervals creating a ladder effect. This allows the investor to be flexible and prevents too much of his portfolio from being invested in low earning CDs when interest rates are poised to rise. 

Long term certificates of deposit have a place in every investment portfolio, but investors must be careful when locking in long-term capital at low rates of return. In order to receive the best CD rates, investors should stagger their purchases of long-term certificates of deposit over the course of several years. As interest rates rise, investors will be ready to capitalize on increasing rates by not having too much of their investment portfolio locked up for long periods of time.