Exploring Alternatives to CD Investments
Oh, how times have changed! Not long ago, I was seeking alternatives to CDs due to their low returns. However, following an aggressive cycle of 11 Federal Reserve rate hikes since 2011, CDs are now offering attractive returns, sometimes over 5%. This boon may not last as inflation and interest rates are expected to decrease, but for now, it’s an opportunity worth considering.
In the past, CDs formed a stable part of my investment strategy, accounting for about 10% of every dollar I saved. The aim was not only to secure some risk-free assets but also to support future goals like buying a home. Even during the 2009 financial crisis, when I lost about 35% of my net worth, knowing that a portion of my investments was secure in CDs provided significant comfort.
Diversifying Away from CDs
As we face a potential decrease in CD rates, reallocating funds into risk assets like stocks and real estate seems prudent. The demand for these assets is likely to increase. Here are a few alternatives to consider:
1. Refinance or Reduce Debt: It makes financial sense to refinance or pay down debts, especially mortgages, when possible to lower payments. Online platforms like LendingTree can facilitate this by having lenders compete for your business.
2. Treasury Bonds: Another safe option similar to CDs is Treasury bonds, which offer tax efficiencies such as exemption from state and local taxes. With current yields over 5%, they are an appealing risk-free investment.
3. Money Market Accounts: Surprisingly, some money market accounts offer higher interest rates than CDs. For those looking for safe places to park their cash, online banks may provide competitive rates.
4. I Bonds: Recently, I Bonds were offering a robust 6.89% return, although the purchase limit is $10,000 per account annually. In 2024, the rate will adjust to 3.94%, which makes Treasury bonds or money market funds more attractive if they maintain yields above 5%.
5. Real Estate Investments: Real estate remains my favorite alternative to CDs. As interest rates decline, real estate values typically increase. Real estate not only retains value but can also generate income, making it a powerful tool for wealth building. For those preferring passive investments, platforms like Fundrise allow investment in residential properties in regions with lower valuations and higher yields.
6. Venture Capital: For those with no immediate liquidity needs and a higher risk tolerance, investing in venture capital through platforms like Fundrise’s Innovation Fund could be lucrative. This fund focuses on sectors like AI and fintech, with a minimum investment as low as $10.
Conclusion: Keeping Perspective in Financial Decisions
It’s important to recognize that all financial decisions are relative. When the yield on a 10-year treasury bond is about 3.4%, it sets a low hurdle rate, making it relatively easy to find investments with potentially higher returns. For instance, the S&P 500’s dividend yield alone is around 1.6%.
If you’re considering moving away from CDs, it’s crucial to aim for returns that justify the increased risk, ideally around 2-3 times the risk-free rate. This could mean targeting returns of at least 6.8% annually.
Why You Might Hesitate to Invest in CDs Today
– CDs are not tax-efficient.
– Their rates often fail to outpace inflation.
– They lack liquidity, locking up your money for extended periods.
– In contrast, private real estate funds are offering returns between 8%-16% due to favorable valuations in America’s heartland.
Ultimately, the choice to invest in CDs or explore alternatives depends on your financial goals, risk tolerance, and investment horizon.
