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How to Diversify Your CD Investments

By sbup Staff

It’s the mantra of  investing all good financial advisors preach: diversify, diversify, diversify. Does the same advice hold true for your CD holding too? Diversification in other investment products is meant to protect you from market fluctuations. But because most CDs are fixed-income investments (except variable-rate CDs), they are insulated against market forces for the duration of their term. The only real reasons to diversify your CD holdings are to stay within FDIC insurance maximum balance limits and to find the best rates.

The government-backed Federal Deposit Insurance Corporation, provides up to $250,000 (this amount is set to be lowered to $100,000 effective January 1, 2010) of insurance for CDs and other bank deposits held at a FDIC-insured institution. This coverage is offered per depositor, per type of account. CDs can be held in both single ownership and joint ownership accounts, which are both covered to the maximum limit. That means an individual with both a single ownership and a joint ownership account could have up to $500,000 in coverage at one institution. Those who have deposits in excess of $250,000 per account must split their funds between different banks to be fully covered by FDIC insurance.

Having multiple accounts at different banks can be a record-keeping hassle. The Certificate of Deposit Account Registry Service (CDARS) run by Promontory Interfinancial Network simplifies the process. This service allows you to invest up to $10 million in CDs from one bank without exceeding FDIC coverage.  They do this by splitting up deposits among a network of banks. The CDs remain on the one bank’s balance sheet, and you are provided with a consolidated statement. For the added convenience, however, you may sacrifice the ability to take advantage of higher rates at other institutions.

Shopping for higher rates is another reason to diversify your CD holdings. Investors can often find outlier CD rates from regional banks and credit unions that offer a sizeable return. Many of these rates are for new customers or new members only. Online banks – like Discover (Stock Quote: DFS) or GMAC Bank (Stock Quote: GMA) also offer favorable rates on new CD accounts. By shopping for the best available interest rates among a wide variety of banks, you can increase your yield. This can be done as part of a CD Laddering strategy.   

Because most CDs are meant to be left untouched for the duration of their term, they require little monitoring. So, dealing with multiple accounts across a variety of banks can be manageable. Where it may get complicated is monitoring the health of each financial institution you invest in.

While FDIC coverage will protect you from losses, your CD may not be honored if a bank fails. It’s best to monitor your banks’ ratings regularly. TheStreet.com’s Ratings Screener makes it easy. You also need to monitor your banks for mergers that could push your account deposits over the FDIC insurance maximum.

Additionally, one downside of having CD holdings at a lot of banks is that you may not be able to take advantage of preferred customer CD rates. Some banks offer customers with large deposits or a lengthy banking history higher rates on CDs. Moving funds from bank to bank can compromise your preferred customer status.

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