Just how low? RateWatch, a banking data and analytics service owned by The Street, Inc. reports the interest rate on a six-month CD decreased 0.01 percent over the previous week based on data collected from over 90,000 financial institution locations.
According to the report, the rate on a six-month CD dropped from 0.17 percent to 0.16 percent. A consumer with $10,000 in the typical CD could expect to earn $80 over the six-month term, or $13.33 a month.
Fed driving down rates
The low rate of return is nothing new, of course. It’s simply a product of Federal Reserve policy, which is aimed at stimulating the economy by keeping interest rates low. The Fed has pretty much maintained this policy since late 2008.
Rates aren’t going up anytime soon, either. The Fed said in December said that it expected this target range to remain “appropriate at least as long as the unemployment rate remains above 6 1/2 percent,” and as long as inflation projections remain within 0.5% of the central bank’s long-term goal of 2%.
For the consumer who has managed to accumulate a little cash, the question remains where to put the money so that it at least outpaces inflation. Michelle Perry Higgins, a principal at the California financial advice firm Maloon, Powers, Pitre & Higgins, says the question has been a frequent topic of conversation around her office the last couple of weeks.
Tempting to chase yield
“I know it is tempting to move money around in search of yield, as many investors are frustrated with the rates on their CDs and savings accounts,” Higgins said. “However, I tell my clients that if there is a chance you might need those funds within the next 7 years, it’s probably best to stay put.”
Despite an anemic economy and signs of fiscal dysfunction in Washington, stocks are at a five year high. In addition to growth in value, many solid, blue chip names are paying yields of three to five percent. While that looks tempting, consumers need to remember that investments in any kind of asset carries a down-side risk. Higgins says stocks are typically a longer-term investment strategy.
“For a more mid-range approach, I might advise a client to consider bond funds, with the understanding they still carry a risk of losing principal value,” she said. “The reason a client might want to stay away from the stock market is that if the funds are for emergency reserves, college funds for today or a down payment on a home in the next few years, the money really should stay liquid and guaranteed in cash.”
Markets can go up and markets can go down. It’s a risk-reward assessment that every consumer needs to discuss their their financial adviser. Money in a CD, earning almost nothing, at least carries no risk, other than missing a gain if other available investment vehicles take off. A five percent correction in a stock or fund, however, could hand you a significant loss.
The risk to the consumer might be great or small. CNBC stock guru Jim Cramer, host of the stock-picking show “Mad Money,” admonishes viewers to only trade with money they are willing to lose, not the money in their 401(k). Few financial advisers would disagree.
“Consumers should always identify what their money will be used for and, so they can understand the level of risk they can afford to take with those funds,” Higgins said.