BusinessReport.com

Certificates of deposit are all the rage these days, the comfort food of investment tools during a time when the stock market seems to have transformed itself into a scary, irrational beast that can’t be trusted with your money.

Risk is out. Stability is in.

Also, Americans seem to have rediscovered the concept of saving. CDs, however, aren’t quite as straightforward as they used to be, perhaps because they come in more flavors. As with everything else, it’s all about reading the fine print.

“Not all CDs are created equal,” says financial planner Ed Shobe of Shobe Financial Group. “You see a lot of things in print, you hear a lot in bank advertising, you hear about brokered CDs. There have got to be differences in all these things, so take time to explore and read the conditions and seek help if you need it.”

Ginger Laurent, the chief operating officer for the Louisiana Bankers Association, says how an investor’s CD portfolio is spread out should depend on cash needs. In other words, how long can you afford to have your money locked up in a CD?

“You may be able to make your portfolio a little bit higher yielding if your need for cash is not immediate and long term rates are higher,” she says. “That gives you good opportunity.

“No matter what your vehicle is, it’s important to be comfortable with the risk. It’s not a market risk in the case of a CD, but it’s liquidity. If you think your need is going to be short-term, then don’t stick everything in a five-year CD.”

Laurent says CDs are getting more attention now compared to recent history “when nobody was concerned about risk.”

“We forgot about risk,” she says. “What we need to remember is that maybe a CD is a little bit lower yield, but there’s no risk. It is an important piece of your plan.”

Domestic, bank-issued CDs entail no risk in that they’re covered up to $250,000 by the FDIC, though that coverage includes the customer’s total deposits—not just in CDs. A risky exception to domestic CDs was the Preferred Placement Offering Memorandum CD the Stanford Group was peddling—and everybody knows how that turned out.

FDIC insurance doesn’t rule out self-inflicted damage to earnings on the part of the investor, which is why it’s vital to read and understand the fine print. It’s the rarely advertised Annual Percentage Yield that doesn’t have an asterisk next to it, and early withdrawal penalties are common, if not universal.

For instance, a recently advertised 59-month, 4.03% APY certificate of deposit from South Louisiana Business Bank in Prairieville, for instance, contained these qualifiers: substantial penalty for early withdrawal; $10,000 minimum balance to earn 4.03%; $10,000 minimum balance to open a CD account; maximum $90,000 deposit and limited availability. Naturally, terms and conditions vary by bank and individual offering.

Kent Smith, manager of Home Bank’s Bluebonnet Boulevard branch, says CDs have grown in popularity since the stock market became so volatile.

“Based on our economy, these are very good places to park your money,” he says. “They are very safe.”

A common strategy with CDs, he says, is “laddering,” which entails opening multiple CDs with staggered maturation dates. As each instrument reaches its maturity date—perhaps six months to a year apart—it’s the investor’s prerogative to plow the earnings back into more CDs, though keep in mind there is a 10-day window for getting your hands on the money before the CD automatically renews itself.

“It allows individuals not to make hasty, emotional decisions,” Smith says. “If you’re constantly having something mature every six months or year, you’re making more conservative decision in some cases.”

Martha “Missy” Epperson, senior vice president with Regions Bank’s South Louisiana private banking group, sums up the advantages of laddering this way: “If you have a laddered portfolio, then you’ll always have the liquidity and you’ll get an interest rate that is higher over time.”

The longer you’re willing to lock up assets in a CD, the more rewarding the interest rate will be. Epperson says CDs are less standard than they used to be. The fine print has been growing as a result. Most institutions that advertise a special rate require a minimum deposit.

Though early withdrawal penalties come with the territory when investing with CDs, Epperson says Regions was preparing to introduce a new 13-month CD with no withdrawal penalty—a reflection of the market responding to consumers’ needs. Thanks in part to federal disclosure requirements, CDs are less mysterious than some other types of investment instruments, she says.

Although FDIC rules limit coverage to $250,000 per customer, a coverage level that was extended to 2013, there are ways even large investors can put in as much money as they want to and still enjoy FDIC protection—not that sinking all one’s investments into one type of instrument is the way to go. It depends on individual needs, which is one of those things you discuss with your banker or financial adviser.

James LaBauve, senior vice president with Iberville Bank, says it’s possible to set up multiple CD accounts under different categories: single, joint and revocable trust. This means individual accounts for you, you and your spouse and just your spouse can be opened—each one covered to $250,000.

Then there are revocable trusts, which can include a spouse, child, grandchild, parent or sibling. And when you consider CD accounts can be spread across any number of banks, all offering the same level of FDIC insurance, the sky is the limit.

“It’s pretty much wide open in terms of being able to have insurance coverage,” LaBauve says. “You have a huge window even dealing with just one institution unless you’re a multi-billionaire or something like that. You can structure it—depending on how many family members you have—so you can keep several million dollars at one institution, and it’s fully insured. That’s the key.”