As the Federal Reserve’s rate-hiking campaign initiated back in March 2022 has led to a significant increase in yields on short-term certificates of deposit (CDs), investors now find themselves facing a dilemma when it comes to deciding what to do with their maturing CDs. The average online CD annual percentage yield has risen from 0.64% in March 2022 to 4.68% as of last Thursday, making these investments more attractive than they have been in years. However, this surge in rates is not expected to last for long, as banks are preparing for potential rate cuts from the Fed in the near future. This poses a challenge for investors who are running out of options to reinvest their money and generate a decent yield.
One of the primary concerns for investors with maturing CDs is the reinvestment risk they face when trying to find new investment opportunities. Michael Carbone, a certified financial planner, points out that short-term yields may fall, causing investors to miss out on the higher yields they could have locked in at an earlier date. This reaffirms the importance of reassessing one’s investment timeline and goals to determine the most suitable course of action with their maturing CDs.
According to financial planning experts, investors should revisit their original plans for the cash invested in CDs and consider reallocating it based on their financial goals. Holding up to 12 months of liquid cash as an emergency reserve is a common rule of thumb, with the rest of the funds being recommended for investment in longer-term fixed income options. Catherine Valega, a certified financial planner, suggests diversifying into municipal bond portfolios as a way to benefit from tax-free income and potentially higher yields compared to CDs.
In addition to extending maturities and diversifying into municipal bonds, advisors are recommending further diversification across different classes of fixed income investments. Josh Nelson, founder of Keystone Financial Services, suggests revisiting fixed income strategies to prioritize capital preservation and income generation. Exchange-traded funds like the iShares MBS ETF (MBB) and the BlackRock Flexible Income ETF (BINC) are being recommended to provide exposure to various fixed income securities with different maturities and credit qualities.
Investors with maturing CDs are finding themselves at a crossroads due to the changing interest rate environment and the need to reassess their investment options. By considering reinvestment risks, revisiting financial goals, and diversifying fixed income investments, investors can navigate the challenges posed by maturing CDs and make informed decisions to optimize their financial outcomes. It is crucial for investors to seek advice from financial planners and explore various investment opportunities to make the most of their maturing CDs in a dynamic market environment.