Due to the Federal Reserve increasing the federal funds rate, several fixed-rate investment options have become more attractive. For the short-term investor, this has created some great opportunities. For a long-term investor who is shortsighted, these same options could be a mistake.
Checking/Savings Accounts – Interest: 0.05-0.2%
Checking and savings accounts are not the place for saving. The interest is minimal, and they accrue losses annually when accounting for inflation. Checking and savings accounts are FDIC insured for up to $250,000, but in most cases, they should not hold anywhere near that amount. There are better places to store cash, especially in the current environment.
Money Market/High Yield Savings – Interest 3.5-4.5%
Money market and high-yield savings accounts pay a higher interest rate than checking and savings accounts while also maintaining liquidity. Most money market accounts are FDIC insured. These accounts are advantageous for short-term savings and emergency funds, especially with today’s rates. However, they are not the place for long-term investors (3 years or more).
Certificate of Deposit (CD) – Interest: 3-5%
CDs generally offer better interest than Money Market/High Yield Savings accounts. Because rates are higher than we’ve seen in some time, there is some excitement surrounding certificates. A word of caution: CDs can be great if part of an emergency fund or structured to fund short-term goals. It is rare we recommend CDs for any term longer than 12 months. Despite their attractive rates, CDs are not the best choice for long-term investors. There are other opportunities that provide significantly greater growth potential.
Fixed Annuities – Interest: 4.5-6%
There are many types of annuities. These products can be complicated and are only suitable for some. Unfortunately, annuities have been misused and have developed a bad reputation. With current rates, these products are very attractive for the right situation.
The fixed annuity is very different from other annuities. It functions in the same way as a certificate of deposit. Fixed annuities are often sold in term lengths of 3, 5, or 7 years. They are very low-risk investments that allow investors to lock in a higher guaranteed interest rate for longer.
Bonds
With higher rates, the bond market should provide some great opportunities. We are excited about what these investments may have to offer and expect investors to be rewarded. For investors with a time horizon greater than three years, we recommend an allocation into bonds.
Stock Market (S&P 500)
An allocation into stocks is recommended for investors with a time horizon greater than three years. For long-term investors, moving into fixed-rate investments like CDs or money market accounts feels like stepping over dollars to pick up dimes.
According to officialdata.org, the stock market has returned 767,709.12% since 1928. Stocks have been, and continue to be, one of the best investments for long-term investors. Don’t let short-term fear influence long-term decisions.
Please get in touch with us to discuss your specific goals, risk tolerance, and proper asset allocations. We are here to help with all of your financial decisions.
Listen to a deep dive into CDs and Money Markets on the Power Up Wealth podcast.
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