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A certificate of deposit, commonly referred to as a CD, involves depositing your funds for a set period of time. During the CD's term, the funds will earn a predetermined interest rate. Locking in an interest rate can help to protect your funds from loss, which can be appealing during a volatile market.
This guide shares opinions from financial experts about how CDs could protect your portfolio and help you get ahead financially, especially when the market is undergoing rapid changes, which often end up in significant losses — but also the occasional big win — for investors.
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1. CDs present a low-risk opportunity
When you lock in a particular interest rate, you also get a certain peace of mind. In contrast to investing in the stock market, you'll know what you'll earn over the CD's term, which can make them a good option for those who are looking for more of a guarantee in a changing market.
"Most investors choose CDs because of their risk-free nature," says Andrew Constantinides, a CFP with Neil Jesani Wealth Management, LLC. If the current market has you worried about taking a big loss, investing at least part of your portfolio in a CD may give you the freedom to take some high-risk/high-reward chances while ensuring you don't lose it all when the market shifts.
2. Opting for CD ladders can keep you liquid
Some investors shy away from CDs because they want the liquidity to reinvest their money as the market shifts. However, during times of flux, having your assets protected temporarily in a CD can offer a lot of perks. Constantinides says you can get the best of both worlds by investing your money in CDs using a strategy known as a CD ladder, which allows you to stagger your terms so that you can quickly reinvest your money without fear or prepayment penalties.
For example, you may opt to split $500,000 up into five different CDs, each with a different term limit, allowing you to reinvest $100,000 each year as you see fit. While it doesn't offer you the freedom to move your money quickly, it does protect large chunks of it at a time.
3. Lock into CD terms based on your goals
While the stock market always comes with risks, your investment timeline can play a major role in how you use these risks to your benefit. That's because those closer to retirement age may feel as though they have less time to earn back significant losses, making it important for them to protect their assets until they are ready to access them by locking into a longer term.
On the flip side, those who aren't close to retirement have more time to absorb their losses, according to Constantinides. "A long time horizon allows for other investments with higher degrees of risk, but also potential for higher returns."
4. Consider non-standard CD terms
When leaning on CDs to protect your portfolio, it typically makes the most sense to find the highest interest rate. However, when the market is uncertain, pairing a non-standard term alongside a good interest rate may prove more beneficial than focusing on the rate alone.
For example, opening an eight-month CD with a relatively high interest rate may give investors a chance to protect their funds for the short term, while still allowing the option to reinvest in something with a higher rate of return if the market turns quickly.
Bottom line
There are ways to use a CD to preserve capital and protect your financial fitness during times of market volatility without tying up your money indefinitely, according to the experts.
However, it's important to remember to keep your specific financial situation in mind when you're considering any financial advice, because what works for one person's timeline may not work as well for yours. As such, it's important to consult with a financial expert before making any significant changes to your investment portfolio, especially during such unprecedented times as these.
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