Should I Sell Stocks to Buy CDs Right Now?
Certificates of deposits (CDs) are offering exciting rates at around 5%, but that doesn't mean you sell your stocks to jump into CDs. Advisors caution investors to stick to their long-term financial plans and consider the limitations of CDs such as—locking in funds and early withdrawal penalties—before making any investment decisions.
Key Takeaways High CD rates may be tempting, but advisors recommend investors to stick to their long-term financial plans.
Stocks and CDs perform different functions in your portfolio and should not be substituted.
Stock markets offer higher risks and higher returns compared to CDs, so a switch may not make sense for investors with moderate risk appetite.
Limitations of CDs include locking funds, early withdrawal penalties, and reduced competitiveness if the interest rate environment changes.
Does the Current Market Favor CDs Over Stocks?
CD rates take cue from the Fed Funds Rate set by the Federal Reserve (Fed) and weren't always as attractive to investors as they are now simply because years of low interest rates meant other investment products offered better returns.
But the Federal Reserve's spree of rate hikes to combat inflation, has put CDs in the spotlight with investors. It also helps that with inflation gradually trending down, some CDs are offering rates that beat inflation.
In the meantime, the turmoil in regional banks rattled stock investors who began looking for safer investment avenues.
The collapse of Silicon Valley Bank and Signature Bank in March sent ripples across the regional banking system. Although the FDIC reimbursed depositors in those banks, shareholders in the failed banks lost their investments.
However, a short-term view of the stock markets may not be the ideal way to arrive at an investment decision.
"People should not get out of stocks and into CDs just because they are paying more today. Look at the S&P 500 so far this year. it has returned 12%," said Frisco, Texas-based Certified Financial Planner (CFP) Jordan Benold. "You should stick with your investment plan since it is a long-term plan, and stocks return more over longer periods."
Are CDs Safer Than Stocks?
CDs are insured for up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). Investors with multiple CDs can hold them safely at different financial institutions if the providers are FDIC members. Investors were concerned about their money after the regional banking turmoil of March 2023, but you can be reassured that your money is safe in a CD account.
"Savers who prefer to hold cash and equivalents over more risky investments and investors looking for diversification in the fixed income allocations of their portfolios can now seriously consider including CDs in their mix of interest-bearing investments," said John Corron, CFP and Senior Wealth Advisor at Concord, Mass.-based Monument Wealth.
But he emphasizes that stocks and CDs serve different purposes in an investor's portfolio, so swapping one for the other may not be a great idea.
Should I Sell Stocks to Buy CDs Now?
The short answer is no. And here's why.
Lower Risk, Lower Returns
Stocks are riskier investments that CDs, but they also provide a greater return potential because of that risk.
For example, if you bought a 3-month CD at the end of December last year (maturing in March this year), you'd have gotten a rate of about 3-4%. Despite the massive turbulence in the market, the S&P 500 returned a little over 7% for the first quarter of this year. Over the long-term, the difference in the returns could be even more stark.
"For longer-term investors with a moderate or aggressive risk tolerance, CDs may not provide the return potential they would like or expect so the switch may not make sense," said Corron.
Flexibility and Re-investment Risk
Most traditional CDs require you to lock your funds in for the term of the contract. Early withdrawals are usually subject to penalties. That means investors must be sure that they will not need the cash during the term of the investment in order to make it worthwhile.
You could work around that by purchasing brokered CDs that can get traded on a secondary market, but they come with their own set of risks. Stocks provide you the flexibility of getting in and out of your position easily and that can help maintain liquidity in your portfolio.
Another factor to keep in mind is that CDs are attractive while interest rates are climbing, what happens when your CD matures but the interest rate environment has changed?
"The highest yields are in the 6-12 month maturity range," said Corron. "When CDs mature there is no guarantee that they can be invested at similar rates of return so while yields are attractive now, this rate environment could be meaningfully different in the not-so-distant future."
Other Safe Investments
If you're looking for safety and guaranteed returns, CDs are not your only option, especially for a long-term investment.
"CDs are not investing for the long term. I tell my clients to invest the bond portion of their portfolio in US T-Bills, which are earning 5.0-5.5% annually. These are short-term bonds are very safe and pay a high rate and will continue to do so," said Benfold, adding that investors could consider using CDs to build out their emergency funds instead.
Rate Collection Methodology Disclosure
Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide, and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the CD's minimum initial deposit must not exceed $25,000.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.
Source: Investopedia
