Interest rates have dropped a great deal over the past year, so anyone getting ready to roll over a certificate of deposit may be in for a bit of a shock when they see where CD rates are today. If that's you, take a deep breath and don't panic. There are ways of coping with rollover shock.

Last year, 1-year CD rates were close to 5%. They've since dropped to less than half of what they were. Someone rolling over a 3- or 5-year CD from a few years ago may also find today's rates disappointing. Those CD rates haven't dropped as far as 1-year rates, but they don't offer a very attractive reward for locking in your money over several years.

It's natural, under the circumstances, to start looking for alternatives to CDs. Just be careful not to switch into something that's not appropriate for your needs.

Beyond CDs: Reaching for Yield

Investors can be tempted into making a mistake when they start overreaching for yield or return. There are some alternatives that offer the potential for higher returns than CDs, but these may carry drawbacks:

• Fixed annuities. These may seem like a natural alternative to certificates of deposit because they promise a fixed rate of return. Unfortunately, annuities often have fees layered on that make their net yield no more attractive than what CDs offer. Also, remember that annuities are not FDIC-insured, so the financial soundness of the issuing company is a critical issue.
• Treasury bonds. On the surface, US Treasuries would seem to have some of the same characteristics as FDIC-insured certificates of deposit. They offer a fixed rate of interest and a guarantee on the principal. Unlike CDs, Treasuries are subject to day-to-day fluctuations in value, but these don't matter much if you hold the bond to maturity. The real problem right now is that 3- and 5-year Treasuries are yielding less than their CD counterparts.
• Corporate bonds. One way to get more yield is to invest in corporate bonds, but this would entail forgoing any government guarantee and taking on the risk of the issuing company. At their worst, corporate bonds can expose you to the same losses as stocks would but without as much return potential.
• Stocks. Stock investments have a place in any kind of a long-term savings program, but so do stable investments. It's best to carefully define the role for each portion of your portfolio and not blur the line between high-risk and low-risk allocations.

It's also worth a reminder here to steer clear of scams that guarantee high returns. People are most likely to fall for those scams when they are desperate, but don't let a little rollover shock drive you toward a much bigger problem.

Revisiting CDs

If considering the alternatives ends up sending you back to CDs, just remember two things. One, deflation over the past year means that the yields have actually been more valuable than they seem. Two, with yields generally low, shopping around is more important than ever. Money-rates.com brings together CD rates from around the country. By using this resource, you should find that you can cushion the rollover shock to some degree.

Source:

CD rates a call for diversity • Aug 11, 2009 • New Jersey Online: http://www.nj.com/business/index.ssf/2009/08/cd_rates_a_call_for_diversity.html

Yahoo! Finance Bonds Center • Yahoo Finance: http://finance.yahoo.com/bonds