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How CDs Fit Into a Diverse Investment Portfolio

CDs are safe bets – which is critical if you don’t have the stomach to watch your investments in stocks swing up and down.

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Should you put all your money in stocks and hope for the best in a bull market? Or should you keep every dollar in a savings account to avoid the roar of a bear? The answer: Neither. Successful investing relies on a mix of both. 

To grow your nest egg and protect your bottom line at the same time, it’s important to embrace a diversification strategy that balances high-risk, high-reward stocks with low-risk, low-return accounts. One of those low-risk options is a certificate of deposit, known simply as a CD

What CDs can do for your investment portfolio

Much of investing has an uncertain outcome. You know what you’re hoping to earn and when you hope to have that amount, but changes in the economy can impact your plans. CDs, however, provide a degree of certainty and calm into your investing strategy. Here’s a rundown of three key characteristics of CDs and what they mean for your portfolio:

  • You’ll know exactly how much you will earn: The biggest selling point of a CD is that it’s a fixed-rate product that takes the guesswork out of investing. If you put $10,000 in a one-year CD with a 5% APY, for example, you know you’re going to have an extra $500 when it reaches maturity. 

The drawback of the fixed-rate component is the possibility that you might be able to earn more elsewhere. If the stock market, for example, is charging like a bull during that year, you’ll likely have a case of FOMO (fear of missing out) as you watch those returns gain higher ground. Then again, if the stock market tanks that same year, you’ll have peace of mind knowing that the money in your CD is protected from the downturn of the stock market.

  • You’ll have relatively convenient access to your cash: Even though you’re “locking” money away in a CD, it’s not a hermetically sealed lock: You can withdraw the money if you wind up in an emergency. However, early withdrawal penalties will almost certainly apply, and you’ll probably forfeit a portion, or all, of your accumulated interest. So, liquidity comes with a cost with traditional CD investing.
  • You don’t have anything to worry about: Put money in a CD, and you can be confident that you will get it all back. CDs are protected at federally insured banks and credit unions by, respectively, the Federal Deposit Insurance Corporation, or FDIC, and the National Credit Union Administration, or NCUA. So, even if the bank fails, your money is safe. 

Is a CD right for your portfolio?

CDs aren’t the only option for diversifying your portfolio with a low-risk investment. You can look at a wide range of other interest-earning saving vehicles such as I bonds, which are issued by the federal government, or high-yield savings accounts. To determine if a CD is a good choice for your finances, review the other accounts in your portfolio. If most, or all, of your money is in stocks, it’s wise to diversify your portfolio with CDs to hedge your bets. However, if you can afford to take on more risk, consider investing in corporate bonds and stocks, for example.

How much should I put in a CD?

To answer this question, you’ll need to decide on how much money you’re comfortable locking away. Make sure you have enough stashed away in a liquid savings account for your emergency fund. Then, it’s up to you to decide how much you want to contribute to a CD. If, for example, you’re a young adult decades away from retirement, you’ll likely want to limit how much you’re putting in a CD. With a longer horizon, you have the ability to be more aggressive with your investing strategy. If you’re older, you might consider putting more in CDs to protect your money.

No matter your age when you open a CD, avoid exceeding the $250,000 FDIC or NCUA insurance limit. If you have more than that, you’ll want to spread it across multiple CDs and institutions to make sure all your money is safe. 

Other CD investment strategies

If you’re thinking about adding CDs to your investment portfolio, it’s important to understand that you can be a bit more creative than simply opening one standard CD account and renewing it when it matures. 

  • Build a CD ladder: CDs come in a wide range of terms, and CD rates are always moving up and down with the market. So, rather than putting one lump sum -- $15,000, for example -- in a one-year CD, you might want to consider a CD ladder. You’ll divide that money into a few different chunks among a few different term lengths. For example, you could put $5,000 in a six-month CD, $5,000 in a one-year CD and $5,000 in an 18-month CD -- or any other mix of amounts and term lengths. Then, when each CD matures, you can either cash out or open another CD to maintain the ladder. You can take advantage of different interest rates, and you’ll have easier access to the cash in the lowest rung of the ladder.
  • Raise a CD barbell: Similar to a ladder, a CD barbell involves only two ends: short-term and long-term. With that strategy, you might open a six-month CD and a five-year CD. However, that five-year term needs to have a big enough APY bump to justify the extended time you’ll have to wait to withdraw your money.
  • Use the interest as income: The best way to maximize your earning potential is to let interest accumulate on top of interest. However, you can also opt to regularly withdraw the interest on a monthly or quarterly basis to help cover your living expenses. This can be a smart move if you’re retired. 

Explore non-traditional CDs: Don’t limit your search to traditional CDs that come with one rate and/or an early withdrawal penalty. Some banks offer no-penalty CDs, which are exactly what they sound like: You won’t pay if you need the money earlier. Other banks offer bump-up CDs, which allow you to exercise a one-time bump to a higher rate at some point during the term. However, that bump isn’t a guarantee: If rates go down, you’re not going to score any extra benefit.

The bottom line

CD rates have been steadily rising over the past year, and you can take advantage of some of the highest rates in a long time right now -- particularly with short-term CDs. Before you open a CD, however, it’s important to think about your investment goals and your timeline to see how CDs can play a role in your strategy.


When you diversify your portfolio, you’re adhering to the adage of, “Don’t put all your eggs in one basket.” It’s an approach that spreads your money across different products with different levels of risk. If one portion of the portfolio is underperforming, another can help offset that subpar return. For example, rather than betting all of your money in the stock market, a diversified portfolio can help you make sure that some of your money is protected and growing, even when the market is struggling.

Ideally, you should include a mix of stocks (the highest risk) and bonds (lower risk), along with some money allocated to safe products such as CDs, high-yield savings accounts and money market funds. However, the makeup of your investment portfolio will ultimately depend on your age, your objective and your risk tolerance. 

Yes, provided they are issued at federally insured banks and credit unions. Up to $250,000 is insured per depositor per account by the FDIC (or NCUA if at a credit union) so there’s a high probability that you won’t lose your money in the event that your bank or credit union fails.

David McMillin writes about credit cards, mortgages, banking, taxes and travel. Based in Chicago, he writes with one objective in mind: Help readers figure out how to save more and stress less. He is also a musician, which means he has spent a lot of time worrying about money. He applies the lessons he's learned from that financial balancing act to offer practical advice for personal spending decisions.
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