IRA Versus CD – Why You Should Have Both?

 

So the question came up, “IRA versus CD? Which is better?” Many people are wondering what on earth to do with their money these days because the financial world has gotten so volatile and out of control. People are rapidly finding out that their investments have gone belly up, or the money they put in the hands of a mortgage broker was actually part of a ponzi scheme (think Madoff). Those who were lucky to dodge those bullets have watched the stock market go from the mid 6000s on the Dow up to over 10,000 in just a couple of months. How can this be?

What Is Causing the Market to Move So Much
The answer is that the market right now is being manipulated by vast amounts of available cash in the hands of institutions, hedge funds, and private investors. It is completely illogical that the components of the Dow Jones Industrial Complex could be worth 6000 one month and 10,400 a couple months later. What fundamentally changed in those 6 +/- months? The answer of course, is nothing fundamentally changed.

What is happening is that there was a huge liquidity crisis where banks, hedge funds, and institutional investors had to unwind large and complicated positions in order to meet demands for cash redemptions and the resulting margin calls on vulnerable positions. The market continues to be impacted by imbalances of supply and demand for individual stocks and cash. The result is weak institutional players are being squeezed out and bankrupted one at a time – each one causing another round of volatility as positions are folded up and liquidated.

How Does the Market Volatility Effect My IRA versus CD Decision?
The answer to the IRA versus CD question is simple: you need both in the same package. Adding an qualified Certificate of Deposit to your retirement portfolio is a terrific way to mitigate volatility (risk) in your retirement nest egg. IRA versus CD doesn’t have to be either or – in fact it should be both. Having both in your retirement account dramatically alters the expected return of your account in ways that substantially reduce risk in ways that an equities only portfolio can not.

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