4 traditional CD alternatives to keep your money growing
June 15, 2011
The problem is that even the best CD rates are stuck at less than 2.4 percent for five-year terms and more typical CD rates are around 1 percent for shorter-term certificates of deposit. Who wants to tie up their money for such a paltry return--even if your principal is secure and your deposit up to $250,000 is insured by the FDIC?
Consequently banks and other financial institutions are starting to roll out some competing products that are still relatively safe but give investors an opportunity for some additional return. Keep in mind that greater risk usually accompanies a greater opportunity for increased return. It's also true that that if you want more flexibility to cash in on increasing interest rates for CDs, you usually are required to accept a lower starting interest rate.
With those caveats in mind, here is a round-up of some of the more recent options:
Rising rate CDs
Although many experts keep predicting interest rates will soon go up on certificates of deposit, savings accounts and the typical money market account, it has yet to happen. To counteract investors' fears that they will be locked into a low-yielding CD and miss the best CD rates, they've introduced the rising rate CD.
Rising rate CDs come in different varieties but they all allow investors to raise their rates a specified number of times during the term of the CD.
For instance, a bump-up CD gives investors a predetermined number of opportunities to increase their interest rate, provided interest rates are, indeed, climbing. One example is the Bank of America Opt-Up CD, which has an 18-month term and allows investors to increase their rate once after the first six months.
Another example is the step-up CD, which increases automatically a predetermined number of times if interest rates climb. Liquid CDs, meanwhile, allow investors to pull out of a CD and invest in a higher-rate CD if interest rates go up.
This certificate of deposit might appeal to investors who think CDs are boring. It protects your initial investment the way a traditional CD would, but it also allows investment in 10 commodities, including gold, silver, platinum, copper, nickel, crude oil, soybeans, corn, sugar and lean hogs.
EverBank's MarketSafe CD is an example of this product, but it hasn't received stirring endorsements from financial advisors because it limits the amount you can make from the commodities. Although it might outperform the best CD rates over a five-year term, critics from the Wall Street Journal suggest you could do better by investing some of your money in a traditional CD and the rest directly in commodities, where your returns won't be limited.
Fans of fixed annuities, common among retirees who want to increase their retirement income, note that their interest rate often beats CDs, and many allow the freedom to withdraw up to 10 percent of the annuity without paying a penalty. The drawback is that your principal is not insured by the FDIC the way a certificate of deposit is.
These are the riskiest alternative to CDs, because the stock you buy could lose value. But if you're investing in a company with a solid performance record, the dividends they pay could be reinvested in more stock. Keep in mind, however, that companies can stop paying dividends at any time.