Fact Check: Are cds a good investment right now?

Are CDs a Good Investment Right Now?

Introduction

The claim under examination is whether Certificates of Deposit (CDs) are a good investment option in the current financial climate of 2023. This question arises amid fluctuating interest rates and varying investment returns across different asset classes, prompting investors to consider the stability and yield of CDs compared to other investment vehicles.

What We Know

1. Current Yields: As of 2023, yields on CDs have risen significantly, with some institutions offering rates around 5% 4. This is notably higher than the average national rates, making them attractive during periods of market volatility.

2. Comparison with Other Investments: The Vanguard 2023 Benchmark Returns report indicates that the S&P 500 Index had a 3-year average annual return of 13.72% as of July 31, 2023 1. This suggests that while CDs offer stability, they may not provide returns that keep pace with equities over the long term.

3. Market Trends: According to Curinos, there was a peak in new-to-bank balances in CDs in 2023, as customers sought to lock in high rates 8. However, this trend may normalize as interest rates stabilize.

4. Inflation Considerations: Fisher Investments notes that while the nominal yields on CDs are appealing, the real returns, when adjusted for inflation, may be less attractive compared to equities over longer periods 4.

5. Risk Factors: The current economic environment includes concerns over U.S. debt and potential defaults, which may influence investor sentiment towards safer investments like CDs 23.

Analysis

The evaluation of whether CDs are a good investment requires a nuanced understanding of both the current financial landscape and the inherent characteristics of CDs.

Source Reliability

• Kiplinger is a well-respected financial publication known for its investment advice, making it a credible source for understanding the current investment climate 1.
• Fisher Investments is a financial advisory firm that provides insights based on market analysis. However, as a firm that manages investments, it may have a vested interest in promoting certain investment strategies, which could introduce bias 4.
• Curinos provides data analytics on retail deposits and is a credible source for understanding trends in CD investments, though its focus is primarily on data rather than investment advice 8.
• Chicago Federal Reserve and the IMF provide economic analyses that are generally reliable, but their focus on credit default swaps (CDS) may not directly correlate with the performance of CDs as investments 23.

Methodology and Evidence

The evidence presented from various sources indicates a trend towards higher yields on CDs, which could make them appealing in the short term. However, the comparison with stock market returns raises questions about their long-term viability as an investment. The potential for inflation to erode real returns is a critical factor that investors must consider.

Conflicting Perspectives

While some sources emphasize the stability and current high yields of CDs, others highlight the opportunity cost of investing in them compared to equities. The debate centers around the balance between risk and return, with CDs offering safety but potentially lower long-term gains.

Conclusion

Verdict: Partially True

The assertion that CDs are a good investment right now is partially true. Current yields on CDs are indeed attractive, with rates around 5%, which can provide a stable return in a volatile market. However, when compared to the historical performance of equities, which have shown significantly higher returns, the long-term viability of CDs as an investment option is questionable. Additionally, inflation may erode the real returns on CDs, further complicating their attractiveness.

It is important to note that while CDs can serve as a safe haven for capital preservation, they may not meet the growth expectations of all investors, particularly those looking for higher returns. The evidence suggests that the appeal of CDs is context-dependent, varying with individual financial goals and market conditions.

Limitations in the available evidence include the lack of comprehensive historical performance data comparing CDs to equities over various time horizons and projections of future inflation rates. These factors contribute to uncertainty regarding the long-term benefits of investing in CDs.

Readers are encouraged to critically evaluate this information and consider their own financial situations and investment goals before making decisions regarding CDs or any other investment vehicles.

Sources

1. Kiplinger. "Are CDs a Good Investment in 2023?" Kiplinger
2. Chicago Federal Reserve. "What Does the CDS Market Imply for a U.S. Default?" Chicago Fed
3. IMF. "What Does the CDS Market Tell Us About the US Sovereign Debt Default Probability." IMF
4. Fisher Investments. "If CDs Are a Safe Haven." Fisher Investments
5. Curinos. "CD Money in Motion Continues to Decline." Curinos