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Jim Cramer Says to Buy CDs

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Amazingly, Jim Cramer, the biggest proponent of the stock market was interviewed on NBC’s Today show the other day and couldn't say anything other than to buy CDs.

It is a video so extraordinary that you need to watch it here.

To be clear, BestCashCow thinks that CDs should always be an important part of a well-diversified, safe portfolio.   We provide the most comprehensive list of the best online CD rates here, and we also encourage folks to look at rates at banks near them and at credit unions near them.

But, we’ve been suggesting people take extreme caution around anything longer than a year, even though two-year CD rates are now above 3% and may attract attention.   In fact, I wrote just yesterday that I do not find a one-year CD at 2.85% APY to be particularly attractive since online savings rates are strong and the Fed is still raising rates.

But, what is quite extraordinary here is that Cramer could be so easily perturbed (to put it mildly) by the recent market volatility.  This is, in fact, the same man who was encouraging people to buy into Facebook at 200, Nvidia at 290, and Amazon at 2000 in November.

I speak at conferences and extol the virtues of CDs, but I certainly wouldn’t tell people to run out of the market here, and I have no intention of unloading my Nvidia or Amazon at this time.

So what is Cramer afraid of?   I, for one, suspect he just trying to create a record of saying everything imaginable in the most vague way possible so that he can point to it and say he was right (especially if we have a 2009 scenario and he winds up on the Daily Show again).


I Am Just Not Too Excited About a 1-Year CD at 2.85% APY

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There are several well-known online banks that are offering 1-Year CDs at 2.85%.  In fact, some banks may even be a little higher.   You can see the list of the best online 1-year CD rates here.   You may also find better one-year CD rates offered by local banks near you or credit unions near you.

BestCashCow, of course, provides the most comprehensive list of CD rates in the US.   At various points, I have highlighted what I believe to be great one-year rates.

I, however, have not been particularly eager to recommend that people get heavily into one-year CDs at 2.85% and that has caught many of BestCashCow’s readers by surprise and been the source of a lot of queries that I have received.

Here are the reasons why I would be hesitant to jump in heavily:

First, the Federal Reserve is still raising rates, most recently moving the Fed Funds rate to a range of 2.25% to 2.50%.   The Fed has also most recently guided towards a neutral rate of 2.80%.  But, they also said that there are 2 more moves in 2019 and one in 2020 and that would take the Fed Funds rate to 3.00% to 3.25% in a little over a year.

Second, I see a risk of real inflation in 2019 and into 2020 as I outlined at the end of this article.  If that happens, we are looking at higher rates and a Fed that will raising faster and higher.

Third, savings rates are pretty high and getting more so.   Even if I believe that they aren’t going higher, they really are unlikely to go lower over the next twelve months.   I count no fewer than ten nationally available online savings offerings at 2.25% and many more available at banks locally and at credit unions.   $100,000 deposited in any of those places paying 2.25% is going to deliver no more than $600 less than a one-year CD (and that $600 difference is fully taxable).   The savings account could also wind up delivering roughly the same amount or even more than a one-year CD if savings rates continue on their upward trajectory. 

Fourth, you are locking your money up and even though 1-year is a short period of time, it is still locked up.   In return for that extra fully taxable $600 (or less) on $100,000, you are locking your money up into 2020.   If you need your principal back, Sallie Mae or Live Oak Bank are going to charge you three months’ interest (other online banks, such as Marcus or Purepoint will actually charge you more to break a one-year CD).  A three-month’s interest penalty on $100,000 at 2.85% is $712.50.

If you have money that you don't need for a year, you can always put some of it into 1-year CDs.  However, if you think that there is even a remote chance that you will need the money back or that rates could go much higher, then the risk-reward of the 1-year CD just is not very exciting.   I’d stay primarily in online savings accounts.


Avoiding Early Withdrawal Fees on CDs by Withdrawing Only Accrued Interest

Like many people who realized three or four years ago that interest rates were not going to go up at the time, I locked some money into 5-year CDs back then.

These CDs are now within a year or two of maturity.   The early withdrawal fees on these are either 6-months’ interest or 12-months’ interest.   As long as you don't need the cash, a quick calculation that most people can do in their heads shows that the penalty would be more than any additional yield that you can get and it therefore makes more sense to hold them until maturity.

Yet, as rates have risen, the interest that these CDs are now paying is a little lower than today’s best online savings rates and is quite a bit lower than current best online one-year CD rates.

All online banks that I am aware of will allow you to withdraw the interest that has accrued to the CDs without any penalty.   While the release of accrued interest is not a transaction that can always be done online, I found that with some online banks it is a 2-minute phone discussion.

It releases a small part of the money in the CD, freeing that money to earn a higher rate.