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Does Your Investment Portfolio Include CDs?

CHICAGO — Despite their puny interest rates these days, bank CDs are, or should be, a part of nearly every investor’s portfolio. With FDIC insurance, you’re sure to get all of your money back with interest — and it gets better if you know the rules.


With current inflation rates running less than 2%, putting some of your money in federally insured CDs is an important step in diversifying your portfolio despite the low CD rates.

But keep in mind that CD interest rates vary sharply from one bank to another, so it’s important to shop around before you buy. Go to to search for the highest available rates.


If you come across an offering of a CD rate that looks too good to be true, it probably is.

Some years ago, a major scam involved investments in an Antigua-based bank that turned out to be promissory notes from the bank, not CDs as the investors expected. When the bank defaulted, it was discovered that it was part of a massive Ponzi scheme and fraud. Millions of investor dollars were lost.

Stick with CDs issued by U.S. banks that are members of the Federal Deposit Insurance Corporation (FDIC). Log on to to make sure the bank you’re dealing with is insured by the FDIC.


As you probably know, cashing in a CD before it reaches maturity can be a costly mistake. Early-withdrawal penalties vary from one institution to another, but they are always painful. One way to help avoid that fiscal trap while protecting your portfolio is staggering the maturities of your CDs at intervals of six months or one year — a technique known as laddering.

Let’s say you have $25,000 to invest. Instead of investing all of it at the same time in one low-rate CD, you buy a one-year CD for $5,000, a two-year CD for $5,000 and continue until your last $5,000 buys a five-year CD. When the one-year CD on your ladder matures, you invest the proceeds in a new five-year CD. The original five-year CD now has four years left to maturity so you still have a five-year “ladder.”

This way, if interest rates rise, you can take advantage of the higher rate when your next CD matures and you have protected the liquidity of your investment by not locking in all of your money in a single CD.


Sometimes known as indexed CDs or equity-linked CDs, market-linked CDs are a special type of CD with interest rates tied to a stock market index such as the Dow Jones Industrial Average (DJIA).

The idea is to combine the long-term growth potential of equity investments with the security of conventional CDs. You may not be familiar with this type of CD since relatively few banks offer them and they are not as common as conventional CDs.

This form of CD usually offers a higher rate of interest than conventional CDs over terms that can stretch out over many years, but it’s important to understand the risks involved. As with conventional CDs, you’ll get all of your money back when the CD matures, and you may benefit from a much higher yield in strong equity markets. However, falling markets could result in a 0% interest return.

In effect, investing in market-linked CDs is betting on a healthy stock market. If you have equity investments in your portfolio, as you should, you may want to ignore this type of investment.


If you have an account with a brokerage firm, your broker can do most of the work for you by spreading your investment over several different FDIC-insured banks. This way, you’ll receive a single monthly statement covering all of your investments.

If you need your money before a CD matures, your broker can sell your CD in the secondary market, thus avoiding an early-withdrawal penalty. Keep in mind, however that the value of a CD on the secondary market will fluctuate with changes in the prevailing interest rate. That means that you could lose some of your principal if your broker sells a CD on the secondary market.


Regardless of how and when you invest in CDs, it’s important to make sure that you maintain the important advantage of knowing that your money is insured by the full faith and credit of the U.S government through the FDIC.

As a CD buyer, you can sleep better at night now that the federal government has permanently boosted bank deposit insurance to $250,000 per depositor, per bank. The limit was raised from $100,000 to the current level in October 2008, but the rise was originally set to revert back to $100,000 on Dec. 31, 2013. Passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act made the higher amount permanent.

To make sure that you have not exceeded the FDIC insurance limits with multiple accounts, use the Electronic Deposit Insurance Estimator at

Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an accountant or tax adviser for advice regarding your particular situation.

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Have a question or comment? E-mail our editor Dave Davis at [email protected] .