The Role of Certificates of Deposit (CDs) in a Diversified Portfolio

Understanding how certificates of deposit (CDs) work

Why CDs belong in a diversified investment strategy

Diversification means spreading your investments across different asset types to reduce overall risk. A well-diversified portfolio often includes a mix of stocks, bonds, mutual funds and cash equivalents. CDs are a stable investment that can help offset market volatility from a larger portfolio.

When stocks or other growth investments fluctuate, CDs provide a steady foundation of guaranteed returns. This makes them particularly valuable for investors approaching retirement, as well as anyone looking to preserve wealth while still earning interest. CDs can also be used for short-term and medium-term savings goals, like a home purchase, tuition or large future expenses.

By blending CDs with more volatile higher yield assets, you can create a balanced approach that aligns with both your financial objectives and your own personal risk tolerance. There is no one size fits all approach for creating a diversified portfolio, as a 22-year-old recent graduate will likely have a higher risk tolerance than a 55-year-old preparing for retirement. Over time, finding the balance that works for you will help smooth the ups and downs of the market and support consistent progress toward your financial needs and goals.

Pros and cons of Certificates of Deposit (CDs)

Like all financial products, CDs have various pros and cons depending on the situation. Understanding both helps you decide how CDs may fit into your overall investment strategy.

Advantages of CDs

• Principal protection: Your deposit is insured by the FDIC up to applicable limits, safeguarding your funds even during market downturns.
• Guaranteed returns: Fixed interest rates allow you to know exactly how much you’ll earn by the end of the term.
• Predictable income: CDs earn interest at a fixed rate, and depending on the CD type, interest may be paid at maturity or at regular intervals.
• Flexible term options: Choose from short- or long-term CDs based on your financial goals.
• Portfolio stability: CDs help reduce volatility by balancing higher-risk investments.

Disadvantages of CDs

• Limited liquidity: Funds are locked in for the duration of the term and early withdrawals may incur penalties.
• Inflation risk: Fixed rates may not keep pace with rising prices over time.
• Opportunity cost: When interest rates rise, funds in existing CDs remain at the original rate until maturity.
• Lower long-term growth potential: CDs generally earn less than higher-risk investments such as stocks or mutual funds.

Despite these limitations, CDs remain a valuable tool for adding balance and security to a diversified investment strategy. Their consistent performance and low-risk structure make them a dependable way to preserve and grow savings safely.

CD laddering strategy

“Laddering” your CDs can provide steady growth and security along with flexibility. Instead of putting all your money into a single CD, a laddering strategy lets you divide it among multiple CDs with different maturity dates.

For example, you might open one CD that matures in six months, another in one year and another in two years. As each CD matures, you can reinvest the funds into a new longer-term CD or use the money.

Laddering offers three main advantages:

• It improves liquidity because your CDs are regularly reaching maturity.
• It helps you capture higher rates over time. If interest rates rise, you can reinvest at the new, higher rate instead of being locked into an older one.
• It provides consistent, predictable earnings that contribute to portfolio stability.

For long-term savers, CD laddering can be an effective way to balance access to funds with the security of guaranteed returns.

How to choose the right certificate of deposit

When choosing a CD, it’s important to consider how it fits into your broader savings and investment plan. Start by thinking about your goals and how long you can set money aside. If you know you’ll need access to your funds within a year, a short-term CD might make the most sense. A multi-year CD can provide higher returns for longer-term goals like a future home or supplementing retirement income.

Comparing annual percentage yields (APYs) is also key. Higher rates usually come with longer terms, but it’s important to weigh the tradeoff between return and flexibility. Be sure that you’re aware of any costs you may incur if you access your funds early.

Finally, consider how CDs fit with your other accounts and investments. Many savers use them along with high-yield savings or money market accounts to balance accessibility and earnings. Layered approaches like this can help you manage both short-term needs and long-term goals while keeping your overall strategy simple, effective and easily manageable.

Certificate of Deposit (CD) Maturity Calculator

To determine the value of your CD at maturity, review Associated Bank’s CD Maturity Calculator. You can also explore current rates and find the right CD term for your goals on the Associated Bank website.