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Anemic Returns or What Is A CD?
December 9, 2008 - Ben Feldman
You know what a CD stands for? Certificate of deposit? No. Cert- ificate of disillusionment. Or, if you like, certificate of disappointment. Now if you want inhibited growth, then get a CD. You get safety , I grant you. But you give up a lot of opportunities with a CD. Also, prematurely cashing in your CD exposes you to a loss of interest and principal. So, how do you get safety without destroying growth? Before answering that question, lets discuss age. You have to decide if you can take risks that are not safe. By that I mean, you could lose some principal. If you are near retirement and don't warm to the idea of incessant volatility, quick gains, and loses with no guarantees, then safety is important to you. You can get your cookies from the banker and safety. But anemic returns will follow, unfortunately. If you will venture slightly to a new concept you can get respectable rates, safety, and peace of mind. Is that worth anything to you? If you have funds available then the first thing is to establish your liquidity needs. Make sure you have cash on hand. Then see if you have insured your assets? That is, if you lose 30% how will that matter to you? To most of us, who are retired, that is a severe blow. It is that kind of a blow that you must consider avoiding. I suggest to clients with the sort of anxiety that drives you to distraction, when looking at an equity portfolio , especially these days with the bailout mania urging us to view the whole sordid economic mess as the Titanic sinking, that they ought to consider a fixed annuity. Particularly, a fixed indexed annuity. The principal is safe and guaranteed not to be lost. You get guaranteed minimum interest rates and a bonus which can be quite high. I have seen them as a high as 20%. And also keep in mind, not one life insurance company has asked the government for money. AIG? That is a holding company that was involved in financial exoctica. I know people that held AIG annuities and nothing happened. Why? Because life products are fully collateralized. You invest a dollar and the insurance company puts a dollar in reserve for you. Good ole common sense in short supply in Washington today. Or, maybe always.
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