Why Buy A 10-year Certificate Of Deposit

Numerous people out there question the need for buying 10-year CDs. And it is smart to question. Let’s consider a few historical data and pose some reasons for and against. Use that information to decide for yourself.

The first reason for considering a 10-year CD is the quest for a stable, decent yield. What is a acceptable rate? Since 1992, the 15-year average rate on 3-month T-Bills has been 3.86%. For 6-months, it has been 3.97%. For 3-month 2nd Market CDs it was 4.24% and for 6-months it was 4.34%. You can view this data and more at www.mortgage-x.com. You’ll need to cut and paste the link. Our database goes back to 1993. The average 6-month rate as of 6/30/09 was 4.448%. The average 5-year was 5.588%. So past data would imply that a rate above 4.50% would be decent and stable. Another thing to consider is the Early Withdrawal Penalty (EWP). IF the EWP is 6-months or less, it won’t be to costly to close the CD and move the funds elsewhere if interest rates rise considerably.

Another reason may be that you would like a well balanced and laddered portfolio. If you don’t have all of your eggs in one basket that is a good sign. What the various baskets are, is based on your risk tolerance, goals, age, etc. When it comes to laddered portfolios, if you have money coming due in the next 1-year, 2-year, 3-year, etc. you are well protected on that front. If CD rates go up, you can take advantage of those as your funds become available. If rates decrease or hold, you have some money on the longer end that are protected with a nice rate. However, it is very difficult to try to have perfect timing. Historical information is just good as a resource; it provides no guarantees of what will happen in the future.

An excellent reason for not investing in a 10-year CD is if it is the only investment you have. Putting all of your CDs in any one investment vehicle isn’t a good idea. So if $100,000 is all you have, putting it in a 10-year CD wouldn’t be advisable. If you are in your later years, and principal preservation is your goal, taking that $100,000 and putting some in savings to cover emergency needs and then ladder the rest would be a good plan.

Another excellent reason against the idea is if you’ll be buying a house, sending children to college, etc. When is the exact question here. If you plan on having any large expenses in the next 10-years, and you don’t have confidence of having other means to cover them, don’t do a 10-year CD. Most longer-term CDs have a large penalty to close early and you don’t want to be in a situation where you have to break the CD. But, try to strategize (on the conservative side) when you will need the investments. Then ladder your CDs out across different maturities. When each maturity comes up, examine to see if you can maintain the maximum term you have set-up.

For instance, you set-up a ladder that has investments maturing every 6-months and the longest maturity is in two years. When the first investments become available, decide when you will need them. If the funds will be needed in the very near future, move them to a high yielding savings accout, otherwise, purchase a CD maturity such as a 1-year, 2-year, 3-year or longer that matches your plans.

Here are some more resources for best bank CD rates and historic rates.

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