Buying CDs? Maybe think again?

Many people are purchasing certificates of deposit to hold their funds. While those investments are FDIC insured, other risks could significantly reduce your investment.

Certificates of deposit are not liquid. If you buy a CD you are bound by the terms of it. You have committed your money for a defined period. Need your money earlier? Pay a penalty for that.

CD interest rates are not particularly good. Today, a simple 5 year duration certificate of deposit will pay anywhere from 2.0% to 2.5%. And that interest rate is locked in for 5 years. Now lets say inflation rears it's ugly head as many economists predict. Academic predictions aside, take a look around. Have prices for food and gas increased this past year. You betcha. Each tick of inflation will erode the locked-in interest rate of a CD. If inflation reaches 3%, your investment is earning less than zero.

And what happens when interest rates rise to more normal rates - and they inevitably will. Your investment would be significantly underperforming. Not good.

So what is an option?

How about investment-grade corporate bonds? Blue chip companies routinely float investment grade bonds to finance acquisitions, upgrades, and expansion. The interest on these bonds is typically several notches about those for US Government issued T-bills and Treasury bonds. These are companies like: AT&T, Wells Fargo, JP Morgan Chase, Walmart, Verizon, Goldman Sachs, General Electric, Prudential, MetLife and Comcast. And the current yields are more than double that of a comparable duration certificate of deposit.

While you can purchase investment grade corporate bonds individually, the best way is through a mutual fund or an exchange traded fund. With these investments you get a basket of investment grade corporate bonds and a monthly income stream.

Risk? Nothing is perfect, but these are considered "investment grade" bonds for a reason - quality companies with solid financials and the ability to repay the debt to bondholders.

Liquidity? You can cash out whenever you like without penalty.