Are Certificate Deposits (CD’s) a Good Investment During High Inflation?

Are CDs are good investment during high inflation?

Today we will discuss what to consider, as well as better solutions in the current environment.

Are CDs a Good Investment During High Inflation?

Are CDs a good investment

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Full transcript:


Alex Okugawa & Anthony Saffer

Anthony Saffer 0:00
The stock market’s been volatile, and people are asking us, are CDs a good investment during these inflationary times? Today, we’re going to discuss whether CDs are a good investment, as well as other solutions you might consider. Stay tuned.

Hey, there, it’s Anthony and Alex from One Degree Advisors. And if you’re new here, we help folks with all things retirement tax and investments. So, Alex, we are in a bad investment environment where it just seems that nothing’s working domestic and foreign stocks are down. Bonds are having just about their worst year since the Great Depression, and real estate starting to soften. Even things like gold are not doing very well. And now interest rates going up are CDs is a good investment.

Alex Okugawa 0:45
Inflation is also sky high. So not only are people losing money on their investments, it’s really like a double whammy with investment losses, then you also have inflation on that Compounding the problem. And so people are rightfully I mean, they’re looking for solutions to help beat inflation and protect themselves.

Anthony Saffer 1:04
The last time we experienced inflation like this was really in the 70s and early 80s.

Alex Okugawa 1:09
And the difference back then was interest rates were also high, right? So we had high inflation, but we also had high-interest rates, so people could earn a pretty good rate of return on their CD at the bank. So let’s do this. Let’s take a look at this chart showing inflation versus the federal funds rate. And this is going from like 1973, through the end of 82. They’re 82 here. And what we can see is that the federal funds rate peaked at over 19%, in the 80s. The point being is that you were able again, to earn a pretty good rate of return on those CDs, they tracked pretty well, exactly. Now you compare that to today. And inflation is way above the federal funds rate. So we’ll pull up this chart pie by JP Morgan. What you’re looking at here is the six-month CD rate is this gray part here, right, so this kind of gray, this gray color here. And headline inflation is the blue color. So you’ll see it back in the 80s. You know, you could earn a rate on your six-month CD that pretty well-exceeded headline inflation.

Anthony Saffer 2:22
You weren’t losing real value, you are gaining a little bit just by having your money in the bank.

Alex Okugawa 2:27
We fast forward to maybe say the 2000 and 10s. And what we’ll see here is that it drops dramatically. So now your six-month CD rate is basically half a percent. Meanwhile, headline inflation is 1.8%. So still, you’re losing value. It’s not as dramatic, but you’re still losing some value. Well, let’s go to 2020, at least so far, and we’ll see that that’s six months CD rate is point 3%. Meanwhile, headline inflation of 5.2%. So the environment is definitely different. And it’s one of those things where it’s posing a lot of challenges for people because you need to understand your investment horizon and what you’re investing for. Right? Not just am I going to put everything in CDs, because I’m nervous, and I need to get out of the market. But what are you investing for? Are you investing in CDs, for just a short-term period of time, meaning, hey, if I need liquidity, relatively quick, I know that I have my CD there, but I’m gonna let my investments just continue to grow over here? I know they will be volatile, but having in your mind the difference of what those two things can do for you is really important.

Anthony Saffer 3:36
Yeah, both of those numbers have come up a little bit since the posting of this chart. So inflation is a little bit higher. It’s above 8%. CDs, you can get in that 2% range, which seems great, you know, compared to where it was. But there’s that huge gap right now.

Alex Okugawa 3:49
And Anthony, you wrote a post talking about how baseball can teach us a lot about good investors. And so we will post that, in the show notes highly recommend for people, especially with market turbulence this year. And then here’s I think two is that we find that you have folks who are worried about the current investment markets, especially when they’re a little bit older, and they’re taking income in retirement. So we’ll post a video we recently published called Three retirement withdrawal strategies for downmarket. People can watch that might find that very helpful.

Anthony Saffer 4:21
Now, here’s the thing too, is that cash if it may not be giving us exactly what we need? We know we’re going in losing real value, but we still do recommend that people have cash on hand. So whether that’s in a CD, or even something like the online savings, savings accounts like ally Capital One, I mean they’re paying a decent rate. So having some cash reserves can make you a better investor and allow you to keep your long-term growth assets invested and deal with the volatility for the long term. Absolutely. Have rising interest rates changed your views on bank investments like CDs or even savings accounts? Leave your thoughts in the comments down below. And if you liked today’s video, please like and subscribe for more. Thanks for watching.

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