This isn't your father's certificate of deposit.
CDs, the super-safe stalwarts of risk-averse savers, have changed -- shedding some of the stodginess that limits their use as investment vehicles. What's more, with the Federal Reserve having bumped interest rates up twice this year, CD rates have risen, too. The higher rates, coupled with an increasing flexibility, have boosted the usefulness of a certificate of deposit as a potent parking place for cash you might need to get your hands on quickly, experts say.
"My personal opinion is that there is a need for CDs in a person's portfolio," says John J. King, managing director of Provident Bank of Maryland's Community Banking Division. "You do need diversification, and we all know what can happen to the stock market."
At a time when stocks have generated several years of historically phenomenal returns, savers sometimes forget that cash is an important piece of any portfolio. Stocks are volatile, meaning that it's risky to expose the money you might need at any time to the short-term vagaries of the stock market, experts say.
CDs are technically "time deposits," so-called because they hold money invested for a fixed term -- as short as one month or as long as 10 years. But, unlike passbook accounts, where consumers can withdraw the money whenever they wish, extracting cash from a certificate of deposit typically requires notice to the bank. Indeed, there are usually penalties for "early withdrawal" -- that is, money taken out before the end of the agreed-upon term.
In return for this rigidity, CD investors get better interest rates than they would in a standard passbook or even in most money-market funds. And, unlike stocks, the money in a CD is typically guaranteed against loss, by the federal government. That's one reason many retirees like them as a long-term parking place for the retirement money they saved during decades of working to finance their "golden years."
During the past decade, increased competition in the financial-services arena has spawned all sorts of new investing and savings products, prompting banks to build some flexibility into their CD products, said Keith J. Leggett, senior economist for the American Bankers Association in Washington.
"Competition is good for the consumer," Leggett says. "It forces companies to work on products that meet consumer needs."
