When investing, it’s important to know your risk profile. Why? Because it helps you find the right investing instrument for you. If you are risk averse, one instrument you should consider is certificate of deposit (CD).
CD is one of the safest investing instrument around. The risk of losing your money invested in CD is practically non-existent which makes it a good choice if safety is your main concern. This is different from other instruments – especially stocks – in which the risk of losing money is obvious.
The drawback is the relatively low rate of return. With CD you can only expect your investment to give you slightly more return than your saving account. There’s also the risk of actually losing the value of your money if you take inflation into account. Because of that, CD isn’t a good choice if you want to grow your net worth.
Another drawback of CD is the fact that you can’t withdraw the money (without penalties) before maturity. So if you suddenly need money, you can’t take your money out unless you’re willing to take the penalties.
In general, it is advised that you invest your money in other instruments that are also relatively safe but also can give you better return than CD. Money market fund, for instance, can give you better return and the flexibility to withdraw your money without waiting for maturity. It’s also almost as safe as CD so there’s no reason not to invest in it.