Interest rates are rising – but did you know you can benefit from this trend? Fixed-income investments, including CDs, that are issued at higher rates will generate more income. While this may make CDs more attractive, here are three points to keep in mind:
- Maturity – It can be tempting to invest in short-term CDs while you wait for rates to rise further. However, short-term rates are generally lower than intermediate- and long-term rates, so holding too much in short-term can reduce your income. Also, there is no guarantee rates will be higher when the CD matures. We recommend owning bonds and CDs with a variety of maturities – known as laddering – which can help smooth out wide swings in your income and doesn’t depend on rates rising or falling.
- Competitive rates – Rates on CDs offered by Edward Jones (brokered CDs) are currently very competitive, especially when compared with many CDs offered directly by banks (bank CDs). With rates rising recently, some banks have been slower to raise their bank CD rates.
- Annualized rates – This is called the Annual Percentage Yield (APY), which is based on each full year you hold the CD. If you were to buy $10,000 of a one-year CD with an APY of 2%, you would receive approximately $200 of interest. However, if you make the same investment in a six-month CD with an APY of 2%, you would receive approximately $100 of interest, or half the amount for holding the CD for half a year.
Building your bond and CD ladder
This pie chart details the types of bonds and certificates of deposit (CDs) you should consider in building in your bond and CD ladder by percentages. It recommends the largest percentage - 40% to 50% - should be bonds and CDs with an intermediate-term maturity of six to 15 years. The second largest amount - 30% to 40% - should be in bonds and CDs with a short-term maturity of up to five years. The smallest amount - 15% to 25% – should be in bonds and CDs with a long-term maturity of 15 years or more.
Stocks have performed well over the past few years, and they may represent a larger portion of your portfolio than you intended. You may need to rebalance to the mix of stocks and fixed-income investments that’s right for you. Check with your Edward Jones financial advisor to determine if CDs may be an appropriate solution.
You must evaluate whether a bond or CD ladder and the securities held within it are consistent with your investment objectives, risk tolerance and financial circumstances. Before investing in fixed-income investments, including bonds and CDs, you should understand the risks involved, including credit risk and market risk. Fixed-income investments are also subject to interest rate risk, such that when interest rates rise, the prices of these investments can decrease, and the investor can lose principal value if the investment is sold prior to maturity.