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Dear John,

There's an ancient Chinese curse that says, "May you live in interesting times." These times certainly have been interesting. The rollercoaster ride in the markets has been enough to turn even the strongest stomachs. As a result, a great many investors have sold their investments in favor of cash and cash equivalents, like CDs. But whether or not these positions are "safe" depends on what you are trying to protect them from.

An adequate cash reserve is an important foundation in any financial plan, so for the sake of your question, let's consider your CDs to be assets that would have otherwise been invested.
CDs are guaranteed by the institution in which they are deposited, and assuming that institution is a member of the FDIC, then your CDs are "safe" relative to the corresponding FDIC limits, at least in the event that your institution fails. And as long as your bank stays in business, it pays you some interest rate to have your money with them. Interest rates are essentially the price of money, and because there are millions of investors seeking out the "safety" of CDs, banks are floating on a sea of money. The result is that they don't have to pay you very much for yours, and deposit interest rates are probably as low as you remember them being.

As nice as it is, money is a just a tool; it's a resource that enables you to do whatever it is you want to do. If you retire and need to draw income from your assets, and want to ensure that you are not spending principle, then you need a certain rate of return on your assets. Maybe CDs, at their relatively low interest rates, can provide this. If you need to spend more than your money is earning in CDs, then you've made yourself vulnerable to "longevity risk:" the risk that you will outlive your money by spending principle and further reducing its ability to provide you with income.

Additionally, we should consider the fact that almost everything will be more expensive in the future than it is today; prices will inflate. Different goods have different rates of inflation, so depending on what you spend your money on, your personal rate of inflation could be up to 5 percent or more each year! So even assuming your money is meeting your needs today, how much do you need it to be earning in the future just to keep up? "Inflation risk" is invisible, meaning that it doesn't show up on an account statement, but can dramatically reduce your purchasing power in the future.

It is never advisable to take on investment "volatility" risk purely for the sake of it.

Overexposing yourself to "longevity" and "inflation" risk can be equally ill-advised. By working with your financial advisor to analyze your needs and determine what rates of return your money needs to earn to provide for your lifestyle, you can create an investment strategy that balances risks and returns to help you achieve your goals. 

So in the end, "are CDs safe," or are they just a safe way to lose money? That depends on what you need from your money.

Stephen Kyne is a partner at Sterling Manor Financial, LLC, located at 18 Division Street, Suite 202 in Saratoga Springs. If you have questions that you would like to see featured in Saratoga Today, you write or call him at (518) 583-4040.

Stephen M. Kyne is a Registered Representative and Investment Adviser Representative of Equity Services, Inc. Securities and investment advisory services solely by Equity Services, Inc., Member FINRA/SIPC. 28 Corporate Drive, Suite 100, Clifton Park, NY 12065. (518) 688-2223. Sterling Manor Financial LLC is independent of Equity Services, Inc. TC52349(1009)