The Good and Bad of Jumbo CDs
Investing in jumbo certificates of deposit has its pros and cons, just as any other high yield investment does. While there are several things to like about these unique investment tools, there are plenty of reasons to think twice about them. Ultimately, it is the investors decesion to figure out if they want to leverage jumbo CDs, or invest their money elsewhere.
What are Jumbo CDs?
Typically, jumbo certificates of deposit are used by larger institutional investors like pension funds. These types of investors or groups have much more money to invest than individuals, which makes a jumbo CD an attractive investment option. Jumbo CDs normally require an initial investment of at least $100,000. Since the initial required investment amount is so much higher than a traditional certificate of deposit, a jumbo CD will offer a slighty higher interest rate. Here are a few reasons why you may want to consider investing in jumbo certificates of deposit as well as why you might want to stay away.
The Good
- FDIC Insured - Jumbo CD's can now be insured up to $250,000 instead of $100,000. Provided the bank is insurable, your entire investing should be safe.
- Higher Interest - Jumbo certificates of deposit offer a higher yield than a traditional CD. Even a fraction of a percentage point higher can make a big difference on such a large investment.
- Security - CD's offer security and guaranteed income, even in a recession. Investors don't have to worry about losing any of their investment, unlike the stock market.
The Bad
- Liquidity - Investing $100,000 or more in jumbo certificates of deposit can tie up your money. Many CD accounts charge a fee or penalty for withdrawing your money early, unlike a savings account.
- Low Interest Rates - Jumbo and traditional CD rates remain low during economic slowdowns. As interest rates fall, so do CD rates. When this occurs, an investor can find much better returns investing in the stock market.
- No Diversification - Investing over $100,000 into a single account does not help diversify your portfolio. Breaking the investment up into smaller chunks and building a CD ladder may be a better option to diversify ones investments.
There are plenty of things to like about investing your money into a jumbo CD. The security and guaranteed return are important psychologically to many investors, especially when the economy is in a recession. On the other hand, there are plenty of other opportunities for investors to make a higher return if they are willing to take on some added risks.
Would you consider investing in a jumbo CD?
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