With interest rates dropping, and CD rates falling in reaction to those interest rate drops, are CD's becoming a less viable investment choice? Through the past few years we have been in a period of impressive yields from certificates of deposits and many people have made a lot of money through those impressive yields. The times may be changing now though, because with a weakening economy and a subprime mess that the FOMC must react to, rates are likely to continue to fall. In fact, in just the past week the average 6 month CD fell from 4.49% to 4.37% according to Bankrate.
Does this mean that one should not consider committing any new capital to a CD? Not necessarily so, but investors should certainly think twice before just looking for a nice short-term CD yield. Why is the short-term CD a questionable investment move right now? Well that is because generally investors allow a CD to simply rollover in their bank account when their CD matures, and if you commit to a short-term CD at this point, it will likely rollover at a much lower rate.
A certificate of deposit is certainly still an option, but you must be smart about it. Understand that the long-term CD is likely your better option at this point. Also understand that if you do choose a short-term CD you will likely want to have a different investment option ready when your CD matures. Allowing your high-yielding short-term CD to simply rollover is now a losing proposition.
The bottom line here is that the CD is still an investment option you can use in your portfolio, but the wise investor will plan ahead for lower CD rates in the near future.
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