Much-maligned CD bests most other investments

October 11, 1992|By Knight-Ridder News Service

They've been beaten up, stomped on, ridiculed, insulted and probably even spat on.

But if you had put $5,000 in a certificate of deposit in January, when rates were around 4.5 percent, you'd be up about 3.4 percent this year, not including compounding.

So what, you say?

Well, consider that during that period, the Dow Jones industrial average is up only 1.00 percent. Or that the broader Standard & Poor's index of 500 stocks is down 1.6 percent. Or that growth-oriented mutual funds are off more than 2 percent.

In fact, with the exception of junk bonds -- not the typical CD buyer's fare anyway -- the much-maligned certificate of deposit has bested just about every investment available this year.

"When you really get down to it, CDs offer a very good return," said Dave Blackenhorn, president of Santa Ana, Calif.-based Commercial Center Bank. "And you can't beat the safety."

How did one of the hottest investments of the 1980s turn into one of the most shunned in the '90s?

Like a lot of other investments, the problem with CDs has been one of expectations. In the 1980s, when interest rates on bank CDs climbed as high as 15 percent, investors came to view CDs as actual investments -- not as short-term places to park money when the economy falters and the markets become unpredictable.

Those high rates, of course, didn't last, while the stock and bond markets continued to grow.

"Now, the people who put money in CDs are forced to make decisions that they've delayed for a decade, and it's at the most inopportune time to be entering the market," said Don Phillips, publisher of Morningstar Mutual Funds, a Chicago-based fund tracker.

Rates are at a 30-year low, and both the stock and bond markets are near all-time highs.

Those who already bailed out are learning that lesson. Brokers and financial planners have been pushing clients into several CD alternatives this year, with unimpressive results.

In the nine months that ended Sept. 30, a saver would have gotten:

* A total return of 2.5 percent on a one-year Treasury bill, as safe as a CD because it is guaranteed by the federal government.

* A yield of 4.45 percent on a popular Series EE U.S. savings bond, also unparalleled for safety, but you'd have to hold it five years to get that rate.

* An average annualized return of 3.55 percent on the more than 500 taxable money funds.

* More than 3 percent on adjustable-rate mortgage funds, which buy pools of home loans. The biggest one, Franklin's Adjustable U.S. Government Securities Fund, was up 3.7 percent through September.

* A loss of 0.27 percent on short-term global funds. These funds, partially invested in short-term bonds of foreign countries, came with yields 1 to 3 percentage points higher than money-market funds. But they got slaughtered last month when Europe's financial markets went bananas.

* An average of just over 6 percent on corporate and tax-free municipal bonds -- the only other practical alternatives to outpace CDs this year.

Investing in CDs doesn't have to be a boring ride-out-the-recession game. There are at least two ways you can improve your CD return.

Instead of pouring $25,000 into a one-year CD, which is paying an average of 3.33 percent nationally, you could put $5,000 each into three-month, six-month, one-year, two-year and five-year CDs.

That portfolio gives you a combined yield of more than 4 percent.

It lets you take advantage of higher long-term rates. And the maturity of 20 percent of the portfolio every three months gives you the ability to react to changes in interest rates.

Another option being offered by several financial institutions is the so-called flexible, or "bump up" CD, which allows the purchaser to lock up a higher interest rate down the road in exchange for committing to a longer term.

California Federal Bank, for example, offers a nine-month flex CD that allows the owner to switch rates once during the term. The CD currently yields 3.717 percent on deposits exceeding $1,000.

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