Should I reinvest my CD money in mutual funds?

Stock Market Graphs - shutterstock_120658870Q: Should I do some­thing dif­fer­ent with my money? I have a CD Matur­ing for $30,000 and see­ing inter­est is so low, I was won­der­ing about invested it in a mutual fund. Which would you rec­om­mend? I am 93 years old and mainly inter­ested in preser­va­tion of my capital.

- Carl, Phoenix, Arizona

A: I under­stand where you’re com­ing from for sure, but – since you men­tioned preser­va­tion of cap­i­tal as your pri­mary inter­est – I’d prob­a­bly cau­tion you against what you’re think­ing.  Or at the very least, I’d want you to fully under­stand the risks asso­ci­ated with mov­ing from secure, guar­an­teed CDs to poten­tially volatile, market-driven mutual funds. That’s not to say that mutual funds in a case like this are a bad idea, they’re just a whole dif­fer­ent ball­game than what you’ve been playing.

Where to start
To be clear, funds do exist that have cap­i­tal preser­va­tion as their objec­tive.  They just can’t guar­an­tee they’ll be able to achieve that goal. Even if you went with some­thing like a high-quality, ultra short-term bond fund, your prin­ci­pal would still be at the mercy of the mar­kets. This means that in addi­tion to giv­ing your­self the chance to make more money, you could be putting your­self in a posi­tion to lose money as well. Granted, ultra short funds tend to be less volatile than short-term funds, short-term funds less volatile than inter­me­di­ate term funds, and so on and so on, but the value of any bond fund can still fluc­tu­ate day-to-day. Some­times those fluc­tu­a­tions result in you mak­ing money and some­times, those fluc­tu­a­tions are neg­a­tive and result in losses.  Also, even though the yield paid by the bonds inside these funds will at least par­tially off­set any prin­ci­pal losses that occur, there’s no guar­an­tee that you’ll end up in the black.

Where to fin­ish
So does all of this mean that mutual funds are a bad idea for you?  I’d need more infor­ma­tion before I could say for sure.  To get a more defin­i­tive answer, I encour­age you to con­tact a Finan­cial Advi­sor to dis­cuss your spe­cific sit­u­a­tion.  They’ll be able to gather the addi­tional infor­ma­tion nec­es­sary to help you decide if this is a good idea or not.  They’ll also be able answer any spe­cific ques­tions you have.

Thanks so much for your ques­tion and best of luck to you!

Scott

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Scott Halliwell and JJ Montanaro are CERTIFIED FINANCIAL PLANNER™ practitioners with USAA Financial Planning Services, one of the USAA family of companies. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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