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Are CDs as Safe as You Think?

The so-called safety of CDs could actually introduce far more risk than you anticipate, especially if your CDs automatically roll over.

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.

It took less than 10 years for compact discs to eclipse the sales of both vinyl albums and cassette tapes. Today, with streaming services and music on our phones, CD players aren’t standard in every new car, and most stores no longer sell CDs. This has left many music lovers with the question: What will I do with all my old CDs?

This is also a question many investors should ask themselves. Unlike their musical counterparts, financial CDs—certificates of deposit—are still a popular short-term savings and income-generating tool since they’re low risk and FDIC insured up to $250,000. They’re not susceptible to market swings, so their predictable nature has kept them in style.

But in exchange for their minimal risk, CDs offer low yields (FIGURE 1), especially in today’s historically low interest-rate environment. Their so-called safety could actually introduce far more risk than investors anticipate, especially if the funds in maturing CDs are set to automatically roll over into another CD. 

Figure 1:

Average National CD Rates
6 month 0.94%
1 year 1.49%
5 year 1.95%

Source: Bloomberg as of 6/30/19


Time in a Bottle

Your time horizon is one of the most important things to consider when making any financial decision, but it’s especially relevant when it comes to CDs. 

For short-term savers, CDs may be a good fit. If you’ve saved money and know you’ll spend it in the next year or so, it could make sense to park it in a CD—where you can’t spend it on something else—and earn a little interest in the meantime. 

But if you don’t think you’ll need to touch that money for several years, you could actually lose money by saving with CDs. Yes, you’ll get your principal back, plus the promised interest, but as the following charts illustrate, you could invest differently to potentially earn more—even while drawing income.

Before the financial crisis, CDs and bonds paid attractive income to investors. But that’s no longer the case. Here’s how low interest rates have impacted the income from CDs and bonds in the last decade.

Data sources: Bloomberg and Hartford Funds, 7/19. 

Data sources: Factset and Hartford Funds, 7/19. 

Data sources: Thomson One and Hartford Funds, 7/19. 

Hypothetical examples and the results for other time periods could differ substantially from that shown above. The CD and bond illustrations assume that income distributions begin one year after the initial investment and are distributed once per year, and no additional contributions are made after the initial investment. CD rate is based on the average 12-month CD rate; bonds are based on a 2.06% coupon rate of a 10-year Treasury note at 1/1/09 and assumes it is held until maturity. The Hartford Balanced Income Fund illustration assumes the continued reinvestment of dividends and capital gains and is for illustrative purposes only. Mutual funds are subject to risk and you could lose money. Taxes and transaction costs were not taken into account. If they were, the performance shown would have been lower. There is no guarantee the Fund will be able to generate an income stream. There are other material differences between the products which must be considered prior to investing. CDs are insured by the FDIC up to $250,000.


You Oughta Know

Missed growth isn’t the only way CDs can cost long-term investors. They’re also susceptible to a double whammy of taxes and inflation.

Even though rates have increased from their financial crisis lows, banks still simply can’t offer high interest rates to consumers today. Then, the interest earned from CDs is taxable, so Uncle Sam keeps a portion of that already measly return. And because CDs hold your money for a set length of time—often enforced with a penalty for early withdrawals—it means your investment may be helpless against inflation.

At the end of the day, it’s not how much an investment makes, but what you keep, that really matters. And when all is said and done, the real return from CDs has been negative for the last several years.


The Real Return of CDs—You (Don’t) Get What You Give

A takeaway, then, is that while volatility is difficult to endure, it can present opportunities for long-term investors. When the broad sentiment is fear and others are selling, it may be time to be contrarian: consider it an opportunity to not only stay invested, but to buy while prices are depressed.

CDs are insured by the FDIC, offer a fixed rate of return, and are generally designed for short-term savings needs. The principal value and investment return of investment securities (including mutual funds) are subject to risk, will fluctuate with changes in market conditions, are generally considered long-term investments, and are not suitable for all investors. Data Sources: Bloomberg, Factset, and Hartford Funds, 1/19. 

In Other Words

To sum it up, since they’re easy and convenient, CDs could still be a good short-term savings tool for you. But ask yourself what price you’re willing to pay for convenience. 

Before you sign up for a new CD or automatically roll over an existing one, take a minute to step back and consider your time horizon and financial goals. Is this the most appropriate use of your money to reach those goals? Or would stocks, bonds, or a combination of both provide income while also growing your wealth for the long term? 

Your financial advisor may not be a music guru, but he or she can help you decide whether or not a (financial) CD makes the most sense for your individual situation. Schedule time now—before your CDs mature—to discuss your options and see if there’s alternative that would make better use of your hard-earned money.


Hartford Balanced Income Fund has served investors well. 


Hartford Balanced Income Fund (HBLIX)

I-Share Morningstar Rating
(as of 9/30/2019)
Overall, 5 stars, 3-Year, 5 stars, 5-Year, 5 stars, and 10-Year, 5 stars, rated against 497, 497, 402 and 267 products, respectively. Morningstar RatingTM is calculated for products with at least a 3-year history, based on a risk-adjusted return measure (excluding any applicable sale charges) and accounts for variations in a product's monthly performance. 5 stars are assigned to the top 10%; 4 stars to the next 22.5%, 3 stars to the next 35%, 2 stars to the next 22.5% and 1 star to the bottom 10%. ETFs and mutual funds are considered a single population. The Overall Rating is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For more information about these ratings, including their methodology, please go to global.morningstar.com/managerdisclosures. Ratings for other share classes may vary and are subject to change monthly. Past performance is no guarantee of future performance.
©2019 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/ or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
497 Products | Allocation--30% to 50% Equity Category
Based on Risk-Adjusted Returns
Performance (%)
% (as of 9/30/2019)
Average Annual Total Returns % (as of 9/30/2019)
Hartford Balanced Income  I 15.34 9.82 7.39 6.86 9.11 7.39
Blended Index 15.16 8.68 6.85 6.30 8.56 ---
Morningstar Allocation--30% to 50% Equity Category 11.20 4.54 4.96 3.94 5.39 ---
Performance (%)
% (as of 9/30/2019)
Average Annual Total Returns % (as of 9/30/2019)
Hartford Balanced Income  I 15.34 9.82 7.39 6.86 9.11 7.39
Blended Index 15.16 8.68 6.85 6.30 8.56 ---
Morningstar Allocation--30% to 50% Equity Category 11.20 4.54 4.96 3.94 5.39 ---
SI = Since Inception. Fund Inception: 07/31/2006
Operating Expenses:   Net 0.65% |  Gross  0.65%
Share Class Inception: 2/26/10.
Class I-share performance prior to its inception date reflects Class A-share performance (excluding sales charges) and operating expenses. SI performance is calculated from 7/31/06.

Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. 

If you’re looking to clean out your old CD collection, they’re #7 plastic, which is not recyclable. You can always sell or trade them in, and they can also be repurposed to keep them out of landfills. Here are some of the most popular ways to upcycle discs:

  1. Coasters 
  2. Mosaics on flower pots, mirrors, picture frames, tables, etc. 
  3. Wind chimes 
  4. Garden scarecrows 
  5. Purchase a pick-shaped punch and make your own guitar picks (also works on credit cards!)

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1 CD rates are reported by the Citi Certificate Of Deposit 6 Month Index.

The tax rate used in the example is the highest marginal federal income tax rate based on $100,000 of taxable income for a married couple filing jointly according to taxpolicycenter.org. The tax rate is not representative of the experience of every investor, and a lower tax rate would have a favorable effect on the real return.

3 Inflation rates are based on the Consumer Price Index (CPI), a measure of change in consumer prices as determined by the US Bureau of Labor Statistics.   

Additional Information Regarding Bloomberg Barclays Indices Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively "Bloomberg"). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, "Barclays"), used under license. Bloomberg or Bloomberg's licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.


Important Risks: Investing involves risk, including the possible loss of principal. Security prices fluctuate in value depending on general market and economic conditions and the prospects of individual companies. The Fund may allocate a portion of its assets to specialist portfolio managers, which may not work as intended. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. • For dividend-paying stocks, dividends are not guaranteed and may decrease without notice. • Foreign investments may be more volatile and less liquid than U.S. investments and are subject to the risk of currency fluctuations and adverse political and economic developments. • Different investment styles may go in and out favor, which may cause the Fund to underperform the broader stock market.

This information should not be considered investment advice or a recommendation to buy/sell any security.  In addition, it does not take into account the specific investment objectives, tax and financial condition of any specific person. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. This material and/or its contents are current at the time of writing and are subject to change without notice. This material may not be copied, photocopied or duplicated in any form or distributed in whole or in part, for any purpose, without the express written consent of Hartford Funds.

CCWP035   212928