Monday, October 31, 2016

Here’s Why Purchasing a CD at Your Bank is NOT Risk Free

Here’s Why Purchasing a CD at Your Bank is NOT Risk Free
There’s an advertising campaign being run on television by a credit union in the Maryland area. The essence of the message they’re trying to get across is that by investing in this institution’s certificates of deposit (CDs), you’d get to earn interest rates that exceed the national average without any risk – the ad specifically uses the words risk free, which I believe is totally preposterous. Why so?
You might be thinking there’s nothing inaccurate here. CDs are known to be safe, and therefore have no risk. I can understand that train of thought. However, it’s not an accurate portrayal of the real situation, because when it comes to saving/investing your money, risk comes in various forms. So that I don’t get overly technical, let’s consider risk from just two perspectives.
First of all, there’s the risk that is associated with the stock market’s movements that could drop the value of your account at any particular time. You could even end up losing everything. For most of us, this is what we think about when we hear the word risk as it relates to our money. That is correct and a very real risk, I might add. It’s why many people choose to go with CDs in the first place. But there is more to the risk than that.
The second type of risk I want to bring to your attention involves a situation where you could end up losing your money due to impropriety or bad management of a company that could result in it going out of business. This is also very real and happens all the time (especially with banks and credit unions), doesn’t it?
Now here’s the million dollar question. While it’s true that the first type of risk associated with fluctuations in the market is avoided when you buy a CD at a bank or credit union, isn’t the second type of risk still present? While you are thinking about it, have you ever wondered why in the world banks like to proudly remind us of the fact that our deposits are insured by the FDIC? Would we need FDIC protection on something that is “risk free”? Of course not.
As I have always maintained, people are smart and know exactly what they want for themselves and their loved ones. The financial industry as a whole owes it to the hard-working folks who depend on us to make sound decisions to give them pure, straightforward, factual information without any semantics. Is this too much to ask?  
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