Better new investment right now - high interest CD or index fund? (2024)

Hi,

With interests so high right now, what might be a better new investment, index funds or CDs? I just opened a Roth IRA at Vanguard and I also have an account at Ally Bank, which has one offer of 5% APY fixed rate for an 18 month CD. At Vanguard I saw some offers on their CD page of 5.35%. Would it make sense to invest in one of these CDs as long as rates are high, then maybe change to an index fund once rates are going down again? Or would investing in an index fund now still be better (and more profitable) in the long run?

At Ally Bank the APY on my regular savings account (40,000$) is 3.60% currently as well and it's nice to get paid a chunk of interest every month without worries, while the stock market seems to be going up and down right now. But maybe buying into an index fund now would be cheaper if stocks are worth less? I would probably not invest much more than 3000$ in an index fund right now (for the Roth IRA), which is not that much, so I could take more risk, and maybe I should just go for it. Is there any particular index fund that you could recommend? It seems hard to decide, as there are so many of them.

Thanks for any advice!

Edit for additional info:

I do have emergency funds
No debts
Single filer, 12% tax rate
Age:53
Residence: California
Asset allocation: Not 100% sure, but probably 60-70% stocks and 30-40% bonds. Not sure about international stock and what the pros and cons of that would be.
Portfolio: I have about 56,000$ in assets, not counting ca 10,000$ emergency funds. I am just starting to invest, so I don't have any index funds right now. I have one 10,000$ I-Bond that can't be cashed in until November (and ideally February, to get full interest). Ca 55,000$ in 2 different banks, one has a 3.60% APY currently. I just opened a Roth IRA at Vanguard and am waiting for 3000$ to be transferred from my bank to that account, so I can then use it to invest. I still have to pay taxes (I am self-employed), so that will be a few thousand.

newinvestor345 wrote: ↑Thu Mar 16, 2023 2:57 amHi,

With interests so high right now, what might be a better new investment, index funds or CDs? I just opened a Roth IRA at Vanguard and I also have an account at Ally Bank, which has one offer of 5% APY fixed rate for an 18 month CD. At Vanguard I saw some offers on their CD page of 5.35%. Would it make sense to invest in one of these CDs as long as rates are high, then maybe change to an index fund once rates are going down again? Or would investing in an index fund now still be better (and more profitable) in the long run?

At Ally Bank the APY on my regular savings account (40,000$) is 3.60% currently as well and it's nice to get paid a chunk of interest every month without worries, while the stock market seems to be going up and down right now. But maybe buying into an index fund now would be cheaper if stocks are worth less? I would probably not invest much more than 3000$ in an index fund right now (for the Roth IRA), which is not that much, so I could take more risk, and maybe I should just go for it. Is there any particular index fund that you could recommend? It seems hard to decide, as there are so many of them.

Thanks for any advice!

The answer to this will depend on your time horizon for needing the money. If the Roth IRA is a long term investment, try to maximize your contributions each year.

Historically, equities have outperformed cash.

At Vanguard, there are many fine index funds, including Boglehead favorites VTSAX, VTWAX, or VFIAX.

If by index fund you mean investing in stocks, then a better answer is to think through what allocation you want between stocks and bonds, buy that allocation, and stay there. It is really hard to position investments for what you guess future returns are going to be.

There are also bond index funds. It could be a reasonable question whether or not you want to hold fixed income in CDs or in bond funds. An opportunity available in bond funds or in individual bonds not available in CDs is for the instrument to be inflation indexed. That may or may not be helpful to your plan.

A good baseline for stock index funds is total market index funds, US and International. You can begin and end there and ignore the other couple of tens of thousands of mutual funds and ETFs out there.

I would advise you to go to getting started on the Wiki: https://www.bogleheads.org/wiki/Getting_started and also look up and read books by the likes of Bogle, Ferri, Swedroe, Bernstein, etc. to get up to speed on fundamentals you need to invest.

Sounds like you're asking about STOCK index funds?

I agree that the risk profile between a stock index fund and a CD are vastly different. Which is appropriate for you depends on your personal risk tolerance, what the money is for and when you will need it.

Because these types of decisions should be made within the overall context of your investment portfolio and financial profile, not in isolation, you might want to consider posting a portfolio review in this suggested format: viewtopic.php?t=6212

Even if you decide not to post, it will likely be a helpful exercise to prepare the information for yourself.

newinvestor345 wrote: ↑Thu Mar 16, 2023 2:57 amHi,

With interests so high right now, what might be a better new investment, index funds or CDs? I just opened a Roth IRA at Vanguard and I also have an account at Ally Bank, which has one offer of 5% APY fixed rate for an 18 month CD. At Vanguard I saw some offers on their CD page of 5.35%. Would it make sense to invest in one of these CDs as long as rates are high, then maybe change to an index fund once rates are going down again? Or would investing in an index fund now still be better (and more profitable) in the long run?

At Ally Bank the APY on my regular savings account (40,000$) is 3.60% currently as well and it's nice to get paid a chunk of interest every month without worries, while the stock market seems to be going up and down right now. But maybe buying into an index fund now would be cheaper if stocks are worth less? I would probably not invest much more than 3000$ in an index fund right now (for the Roth IRA), which is not that much, so I could take more risk, and maybe I should just go for it. Is there any particular index fund that you could recommend? It seems hard to decide, as there are so many of them.

Thanks for any advice!

See Also

Are CDs Worth It Right Now? Here's What Experts Say | Bankrate

Just to be sure you're aware: While brokered CD rates are higher than bank CD rates, there's one (potential) negative to be aware of: With bank CDs, early withdrawal penalty is well defined in the contract. Not true for brokered CDs. If you want to break a brokered CD early, the broker will sell it for you on the secondary market. You get what someone is willing to pay for it.

I buy brokered CDs when I'm 99% sure i won't need the money early

They are just different investments for different risk profiles.

CDs are great if you need a guaranteed return and payback over a fixed period.

A broad market index fund has always had higher returns than CDs given enough time, but it can definitely drop considerably in the short to medium term.

So really it depends on how soon you expect to withdraw the money and how much you can afford to lose in the short term.

newinvestor345 wrote: ↑Thu Mar 16, 2023 2:57 amHi,

With interests so high right now, what might be a better new investment, index funds or CDs? I just opened a Roth IRA at Vanguard and I also have an account at Ally Bank, which has one offer of 5% APY fixed rate for an 18 month CD. At Vanguard I saw some offers on their CD page of 5.35%. Would it make sense to invest in one of these CDs as long as rates are high, then maybe change to an index fund once rates are going down again? Or would investing in an index fund now still be better (and more profitable) in the long run?

At Ally Bank the APY on my regular savings account (40,000$) is 3.60% currently as well and it's nice to get paid a chunk of interest every month without worries, while the stock market seems to be going up and down right now. But maybe buying into an index fund now would be cheaper if stocks are worth less? I would probably not invest much more than 3000$ in an index fund right now (for the Roth IRA), which is not that much, so I could take more risk, and maybe I should just go for it. Is there any particular index fund that you could recommend? It seems hard to decide, as there are so many of them.

Thanks for any advice!

Not really enough info in the OP on your entire financial picture to give good investment advice.
But I would try to fully-fund that IRA for tax year 2022 before the 'contribution window' closes on April 15th.

Hi,

I just edited original post for more info.

For the Roth, I would not be looking for all stocks, more like a balanced fund. I was thinking about 70% stocks, 30% bonds, or 60%/40%. I don't spend a lot of money and save all I can, but it's always possible that there could be an unexpected expense, and so I don't think I would put all of my money into funds right now.

I was trying to start off my investing journey with that IRA, since it wouldn't be too much money right away and I could learn more about how to invest. I was being conservative with the 3000$, but I could put up to 7000$ for 2022 into that account. Would it be a good idea to do that? Would I have to invest all of that money before April 15th, or could I have it in the account without investing it for a while until I decide which fund to buy? Would I be able to withdraw money from such an account if I needed it without penalty?

Does one generally have only one fund in a retirement account, or can (and should) one have more? Do the 100% stock funds usually give the best returns? Maybe one could put a smaller amount into one of those, then the rest into a more balanced fund? Most funds seem to have a 3000$ investment minimum, so that's why I initially transferred that amount. Are ETFs as good as other mutual funds (looks like the minimum is lower on these)? When researching funds, what are the main things to look for on the page detailing these funds to see if they might be a good investment? Could two similar-looking funds with similar asset allocation (such as 70% stocks/30% bonds) perform vastly differently?

Thanks for all the helpful replies, this is a great forum for new investors and I appreciate all of the help here!