Investing money wisely is a challenge to even the most savvy financiers. The desire to earn higher interest or gains often outweighs the risks associated with possible loss. Taking these risks for a chance at higher gains is good for a portfolio, as long as everything isn’t tied into the gains. It is important to diversify investment portfolios to reduce the risk of loss.
Don’t put all your eggs in one basket, as the saying goes.
There are safe ways to invest funds without taking the risk of loss. One of these is by looking for the best CD rates available to you. A CD, or Certificate of Deposit, works like a money market account except with higher interest rates. A CD is a promissory note from a bank that upon maturity earns a designated interest rate. What that rate is varies by factors such as:
• Length of deposit, or the number of months or years the funds are placed in the account.
• Amount of deposit. Larger sums are subject to different interest rates than smaller.
The interest rate determined for designated CD’s is a sliding scale that is determined by a combination of the previous two factors. Instead of investing everything in stocks for a risk of loss or gain (also known as a risk tolerance), take some of that money and place it in a CD. If the stock market takes another unexpected tumble the money invested in CD accounts is safe. The interest rates are locked in for the term of the account and the stock market has no direct impact on the funds within it. Taking some of the risk tolerance and turning it into a risk free investment is an important step toward
asset allocation.
Deposit bankers are individuals who work either independently or with a brokerage firm. In some cases they are able to negotiate higher interest rates for clients. Contacting a brokerage firm or individual is a good way to begin diversifying a financial portfolio.
If an investor is not interested in brokerage firms, they should shop around for rates. Not all banks offer the same interest rates. Once the term for the CD is determined, shop around to find the highest interest.
Discover Bank offers competitive CD rates with flexible terms; they offer pretty much the best CD rate out there right now, but you never know until you look.
Be sure to find out if the rates are variable or fixed. Variable rates can hurt investments if the interest rate goes down, but if the rate goes up it can help the investment create more gain. There is some risk involved in choosing a variable rate CD, but the risk is weighed against the interest earned instead of the initial investment.
After a CD matures, it can either be automatically renewed (if the option is part of the initial investment) or it can be renewed by the investor. While automatic renewal takes the hassle out of the hands of the investor, it does not capitalize on the potential increase in interest. The higher the investment the higher the interest rate on CD’s, so upon maturity it is up to the investor to determine if that money will be reinvested in whole, or if the interest will be used to further diversify the portfolio.
Many investors choose to use the interest gained off the first CD to diversify into short term and long term CD’s instead. They do this by:
• Taking the initial investment and turning it into a long term, high interest CD.
• Taking the interest earned off the initial investment and rolling it into a short term CD. These do not have as high of an interest rate, but by separating the interest gained from the initial investment it will increase the interest earned over time faster than a long term investment would.
If returns are not reinvested the investor makes very little profit in the long run. Spending returns does nothing to increase the portfolio. If the investor wants to create, diversify, and increase a portfolio all funds put into that portfolio must be kept in the portfolio. This includes all returns gained. While unexpected expenses happen and it is okay to tap into the funds in the portfolio on occasion, there is no room to grow without continuous investment. If these expenses come up, give your finances a stress test to determine need.
In order to keep records from slipping through the cracks it is important to
manage records. Keep track of investments, payments, and legal documents to make sure nothing is lost or stolen and that old investments continue to roll seamlessly into new investments. Getting a safety deposit box or an in-home fire resistant safe is advisable to keep records protected. Asset allocation is an important factor for any investor, whether new to the game or looking to diversify an investment portfolio.
