Investors may be finding themselves in between a rock and a hard place when it comes to choosing where to put their money these days. With inflation rates higher than interest rates on safe investment options such as CDs, real returns on these investments, after inflation, are negative.
But, the prolonged economic uncertainty and the volatility of the stock market make stocks an unappealingly risky option for conservative investors despite their potentially higher returns.
A California-based research company, Market Rates Insight, revealed that in April the inflation rate was greater than the returns on any available 5-year Certificate of Deposit for only the second time in the last 10 years. Yet many Americans are still opting to go the safer, rather than the riskier, route with their money, according to the Federal Reserve. In April, the Fed reported that almost $9 trillion was parked in CDs, bank accounts and other government-insured products.
Jeff Ryan, a senior financial analyst for Findrates.com makes the following observation: “Apparently, Return on Investment (ROI) with CD’s is greatly threatened by the inflation risks and instability of American currency. When inflation and taxes are added into the calculation of profits, investors realise that ROI potentials are greatly limited.” But for many people, especially those who are already retired, their utmost concern is that their money won’t be lost if there is another stock market crash.
There are a few different approaches for those who prefer to play it safe. If having cash savings available is a top priority, then buying short-term CDs is one option. Purchasing CDs that have a maturity rate between 3 months and a year is a simple way to make sure that the cash will be available to use when needed or hopefully find a higher interest rate when these CDs mature.
If you don’t need the money for years, some experts recommend find best rates with a longer-term approach by buying 5-year CDs to lock in higher rates than are available on a short-term CD. According to Scott Cramer, a retirement planner in Winter Park, FL, “The best hedge against it (inflation) is to make the best returns possible. If safety is the person’s main goal, then we are kind of stuck as to what the options are. But they can still make enough money to outperform inflation over time.”
A good way to research best CD rates is by visiting the Google Advisor. There investors-to-be can read up on rates, compare terms and shop around until finding the CD that is best suited for their current economic situation and longer-term financial goals. Heed the warning of financial advisors to always closely examine all aspects of a financial product before buying to make sure it is not laden with excessive costs and fees or onerous penalties on early withdrawal.
Stephen Curley, a certified financial planner at the Orlando-based financial-planning company Water Oak Advisors, says: “The fact is there is just a massive gap right now between the FDIC-insured solutions that yield next to nothing and the risk-type investments. Nobody really knows absolutely how to defend against inflation without taking some stock or higher-yield, bond-type risk.”