Are Certificates of Deposit Good Investments?

Nobody wants to work forever. But the only way people can stop working is to either win the lottery-an unlikely prospect-or have enough money saved for retirement. Unfortunately, saving isn't enough. The money that you accumulate must be invested wisely in order for it to grow into a comfortable nest egg.

There's no doubt that stocks have been the best performing investment over the long term. However, there's a high degree of risk involved with putting your money in equities. If you don't balance the risk with a safer vehicle, you could see your nest egg cracking during periods of down markets.

In order to protect your money, you need to balance your portfolio with an investment that guarantees that you'll make money. For that portion of your portfolio, certificates of deposit (CDs) are a great tool. They offer competitive rates of return, and are federally insured up to $100,000.

Tips for purchasing CDs

Here's a guide for adding CDs to your portfolio:

1. Identify your investment goals. First, decide how soon you'll need your investments for living expenses. Evaluate both current and future needs. If you have many working years before retirement, you can safely choose a longer term CD. On the other hand, if retirement is around the corner, consider the shorter-term instrument.

2. Avoid early withdrawal penalties. Review CD terms before purchasing. If funds are withdrawn before maturity, you'll generally pay a penalty. Think twice before opting for early access to your money.

3. Be aware of automatic rollovers. Some CDs have an automatic rollover policy. This means that, if you don't request action, your CD will automatically rollover into a new one, and you'll be locked into an interest rate that you may not want. If you keep track of maturity dates, you can make sure that you get the best CD rates available when you purchase anew.

4. Choose the longest term you can afford. As a general rule, longer terms pay higher CD rates. Choosing the longest term you can afford will help you earn more.

5. Let your interest compound. As the saying goes, time is money. This is particularly true with regard to the length of time that you keep your assets invested. If you don't need the interest income now, continue to reinvest. This will ensure the growth of your savings.

6. Keep your short-term needs in a liquid CD. A traditional savings account won't pay as much as a CD. If you're close to retirement and need easy access to your money, consider liquid CDs. Rates are competitive and access to your money is easy. Invest the rest of your funds in regular CDs to maximize your earnings.

Use safe investment vehicles, such as CDs, to protect yourself from market risk. While they don't offer double-digit returns, they do offer consistent gains and, most importantly, no losses. That's why they're a great investment, and should be considered as a part of any well-diversified portfolio.