With all of the turmoil going on around the world and the uncertainty of the economic environment, a lot of people are hesitant to be invested in the “markets.”   Many prefer to have the safety and security of a bank-issued Certificate of Deposit (CD).  After all, a CD is guaranteed.  What most don’t realize is that while they are guaranteed…the guarantee is that they will lose you money!

No, you won’t lose your principal, which is the money you put into a CD.  If you buy a CD for $10,000, you will get your $10,000 back when it reaches the maturity date.  And you’ll get it back no matter what happens in the markets because it is FDIC-insured.  So, how can you lose money?  Let me explain…

Yesterday, the Wall Street Journal reported that “The average yield on one-year “jumbo” CDs, which typically require deposits of $95,000 or more, was at 0.51%, according to Bankrate.com.”  So, you might be thinking, “0.51% isn’t a lot, but at least I’m not losing money.”  But you would be wrong.

Here’s the problem…and it’s one that most people don’t think about.  On April 15^th, the Bureau of Labor Statistics reported that the Consumer Price Index increased 0.5% in the month of March.  The Consumer Price Index is a report on the change in prices paid by consumers for a representative sample of goods and services.  In other words, it’s a measure of inflation.  The report goes on to say that over the last 12 months, the index increased 2.7 percent.  As part of the monthly report, they also provide data that leaves out the more volatile food and energy prices.  That data shows that the CPI, minus the food and energy components, gained 0.1% in March and 1.2% over the last 12 months.  I don’t know about you, but a big part of the goods and services I buy each month are food and energy.   And the energy part seems to be getting bigger each day!

So, let’s say you are lucky enough to have $100,000 sitting around and you want to get one of those one-year “jumbo” CDs mentioned earlier.  With an interest rate of 0.51%, you would earn $510 on your $100,000.  So far, so good.  And that’s where most people stop their analysis.  But, when you get your $100,000 back, you’ve actually lost money.  Well, maybe you haven’t really lost money.  What you’ve lost is even more important…purchasing power.  When you bought the CD, that money could have purchased $100,000 in goods and services.  If we assume that the increase in the CPI stays at current levels, when you get your $100,000 back next year, it will only buy $97,300 worth of goods and services.  Inflation is the thief that guarantees that your CD will lose you money.

This is the reason that you will hear financial-types like me say that the biggest risk to someone living on a fixed-income isn’t the risk of being in the markets.  The biggest risk is that your dollars will buy less and less each year.  This is also the reason that we generally suggest that you keep some portion of your portfolio invested in growth investments…to try and stay ahead of the inflation thief.  Yes, growth investments come with some risk to your principal.  But I’ve already illustrated how that “safe” CD is guaranteed to lose you money.  It’s just a different type of risk.