My CD has matured, and I can't get up

January 8, 2007 1:23 PM

What should I do with my CD now that it's going to mature for the second time?

One year ago I placed a reasonably large sum of money (for me) into a 6-month CD because I couldn't decide what to do with it, and figured it should earn interest while I thought about it. After 6 months, it matured and I renewed it for another 6 months. Now it's going to mature again and I still haven't thought about what to do with it. It's currently earning 5.4% interest.

Goals: have it earn a good rate of return with medium level risk. Intention is to use the money for a home remodel or purchase some day. I have other savings to deal with loss-of-job kind of events, so this is purely investment money. I can't accurately answer the inevitable "what's your timeline" question, but figure as long as 3 years, but maybe not as long as 5 years.

WWAMD (what would ask metafilter do)?

(I'm in the U.S.)

posted by mcstayinskool to work & money (14 comments total)

Create a CD ladder, and continually reinvest at the best available interest rate.
posted by ijoshua at 1:29 PM on January 8, 2007

A CD is low return and no risk. You say you are looking for a good rate of return with medium risk. A low-cost index mutual fund is worth looking at.
posted by Uncle Jimmy at 1:36 PM on January 8, 2007

With a 3-5 year time line I think I'd stay with CDs. Stocks are way to risky for a 3-5 year time frame. You won't have time to recover if the market tanks.
posted by COD at 1:39 PM on January 8, 2007

Yeah, an index fund like DIA (or QQQQ if you're a little edgier) is what immediately jumps to mind when you say "medium risk". Or you could go the Warren Buffett juggernaut route and pick up some BRKB. (Which I considered, but then decided wasn't risky enough for me. ;)

Keep in mind that sometimes it can make sense to create medium risk by splitting your portfolio into half high-risk, half low-risk, or whatever proportion you prefer.

At the end of the day, you should be comfortable with where your money is, and, if it really is investment capital, be willing to accept a decline in value.
posted by trevyn at 2:07 PM on January 8, 2007

Your CD is almost certainly FDIC insured. That means you're not meeting your goal of medium risk. While the risk of FDIC defaulting is probably not zero, if FDIC were in fact to default you would by then have more serious worries, like how not to be shot in the ongoing food riots. In other words FDIC-insured CDs are about the lowest risk things you can find, second only to Treasury bonds.

If your timeline is 3-5 years, you might consider locking in a 3 or 5 year rate right now; rates will probably fall considerably over that period.
posted by ikkyu2 at 2:10 PM on January 8, 2007 [2 favorites]

I'm in the same boat, selling a house and having to rent while I return to school. I'm planning to keep my equity in a CD for the 3-4 years, except for a small amount in easily accessbile savings. I'm assuming a 3-year will offer higher returns than a 6-month, but I haven't looked at the actual numbers yet. As COD says, stocks are a little risky in this case. We're planning to use our interest off it to put into a new car when I've graduated.
posted by monkeymadness at 2:11 PM on January 8, 2007

Be careful when talking about "risk" as it is an incredibly complex term that can easily be misinterpreted by less academic money managers. I have somewhat of a strange hobby with risk in markets and how it is continually misjudged. There's many books out there that can better outline the mathematical modeling and errors in many risk tools (especially VAR).

Something to keep in mind is that unlikely events happen more often than they should. As someone above pointed out the FDIC failing is a real risk, but one of those Mad Max types of risk (of course Russia defaulted and came back without any major war).

My point being, do not put a lot of value in models that you do not understand. If you go to a money manager and they say "this is medium risk" and cannot explain why without reverting to models they themselves cannot explain, I would put flags up.

That said, I always like to look at worst case scenario against how much I am expected to earn. I'd rather lose a little a lot of the time if things go sour rather than losing everything in a so-called ten sigma event.

Beyond that I cannot offer specific advice except that a broad energy based fund would look rather attractive at this point. I do not see energy prices collapsing as something realistic in the short term. You may lose a little if prices take a dip, but I don't think it is possible for Saudi Arabia to open up spigots and drive prices back to $20/bbp.
posted by geoff. at 2:28 PM on January 8, 2007 [1 favorite]

I would take on more risk for more return. A CD is nearly no risk - the risk is that the United States government defaults. As ikkyu2 says, at that point you'll have more to worry about than your CDs. You might also factor in your true return, comparing the rate of inflation with your CD interest rate. In 2005, based on the consumer price index, the average rate of inflation was 3.39%. You earned 5.4%, and so you made 2.01% in 2005 from the CD.

To look at mutual funds, you should look at the past 10 years of performance to get an idea of what to expect. My prospectus for my S&P 500 (which is roughly the 500 largest US companies) gives these returns:
1997: 33.03%
1998: 28.62%
1999: 20.67%
2000: -9.27%
2001: -12.09%
2002: -22.19%
2003: 28.05%
2004: 10.51%
2005: 4.77%

It's a gamble, certainly. In 2003, that CD looked pretty good! But on many of the years, that CD does not look good at all. I guess it depends on your tolerance for risk, but by accepting a small amount of risk more than you are doing now, you could get a lot more money. And if it dips? Just keep the money in there until the market returns, which is do-able since you have other money set aside for job loss, emergencies, and so on.
posted by Houstonian at 3:23 PM on January 8, 2007

I agree with everything ikkyu2 said, except:

rates will probably fall considerably over that period.

Do not, under any circumstances, assume this. Conclude this if you have reasonable evidence of your own that suggests a decline in interest rates, but if you've done no research on this matter, don't assume anything.

And if you're talking about less than 10 grand, my opinion is just stick it back in the CD as ikkyu2 said (but I disagree with the length of the CD). 10 grand isn't enough to diversify properly and a lot of mutual funds will kill you on the rates (plus, investing in them takes a while to research to figure out what's the best for you). CDs are simple, painless, and allow you flexibility.
posted by SeizeTheDay at 3:43 PM on January 8, 2007

I haven't amde anything like 5.4% on my mutual funds this year. I think you're doing pretty good with the CD but IANAmoney expert.
posted by fshgrl at 6:32 PM on January 8, 2007

this year, like 2007? or 2006?

it was an up market last year... i think you need to look for some different funds!
posted by joeblough at 7:20 PM on January 8, 2007

Right right, STD is right. Don't take my word for it that rates are going to fall - do your own research. If you want CDs but want to do it in a rate-agnostic way (not trying to predict the future), definitely look into laddering.
posted by ikkyu2 at 7:37 PM on January 8, 2007

Gmacbank.com has Savings accounts at 5.30%. Doesn't answer your question but you could put your money there without it being locked away until you find your answer.
posted by 5bux at 12:14 AM on January 9, 2007

It's unclear how much money you are talking about, so maybe the fees and commissions would kill your returns (although the lower long-term capital gains tax rates would help you), but with a time horizon of three to five years, if I were in your shoes I would definitely be investing in stocks and stock funds.

If your goal is good return with medium risk, you should definitely be investing in equities. With CDs, you are getting low return and no risk. Some well-regarded stock funds are probably a good place for you to be. Your potential reward for additional risk may be very high - the broad funds market was up 20% or more in 2006. And you'd be hard-pressed to find more than a few periods during which the broad funds market was down during a five year period.
posted by jcwagner at 8:34 AM on January 9, 2007