Are CDs "No Risk"?

DANO WEIR: What kind of boomer advice is this? Money Market accounts? Crypto's gonna change the whole thing. Bitcoin's gonna change the whole thing. And I said, interesting. Well, let's do an episode on CDs!

DANO WEIR: Welcome to It's All Money. Hosts are right here in front of you. We're checking out It's All Money.

DANO WEIR: Let's do an episode on CDs. We are your source for boomer advice right here at It's All Money.

DAREN BLONSKI CFP®: I don't think boomers like to be called boomers.

DANO WEIR: I'm in. No, I'm 40 now. I love to be. Wait, are you a boomer now? I'm part of it. I love it. No, you're Gen X, man. I'm owning it.

DAREN BLONSKI CFP®: I'm part of it. Maybe Gen X will give you, but you're probably more millennial.

DANO WEIR: The boring advice, the advice, the trusted advice, that's what I like to be a part of.

DAREN BLONSKI CFP®: Yeah.

DANO WEIR: Welcome to It's All Money. Today we are asking the question, what is the risk of a CD and a Money Market? And that was one that came up in response to a prior episode that we did about money markets with Chris Sipes.

DANO WEIR: So Chris said a few times he was talking about the risk of a Money Market, and most people would presume those to be no risk or very low risk. Some people maybe not following that. We thought we'd define what are CDs, how are they used in comparison with money markets. And Darren, you had some thoughts you wanted to share on the two.

DAREN BLONSKI CFP®: So I'll take some risk, but not no risk. Okay. There's always risk with any financial tool, right? And that's the first thing you need to know. Second thing you need to know is that Wall Street, your local bank, they're fundamentally manufacturing businesses. So what does that mean? It means they're looking to convert your money to a financial instrument.

DAREN BLONSKI CFP®: So a CD and a Money Market, they're both financial instruments and they both have certain risks associated with them, some more, some less. And it also depends on the institution to create that risk, right? So let's break it down. So CDs were a way that banks could bring in more assets. So we have what's called a fractional reserve system in the United States.

DAREN BLONSKI CFP®: What that means is that some of your money goes into the bank, but not all of it stays in the bank. In fact, most of it goes out and gets loaned to other people. So in that process, the bank is making money on what we call spreads, the spread between what they're paying you and what they're paying somebody else, right? So you always want to be mindful of what's the spread here.

DAREN BLONSKI CFP®: If this bank's offering me this money, what are they loaning it out for? And that's what will change the flow of money into CDs or into money markets, depending on what those spreads are. For many, many years, interest rates were so low, we didn't really have a spread. There wasn't really money you could make with keeping your money in the bank.

DAREN BLONSKI CFP®: Investors who were conservative were struggling because there was no way to get a good return on your money without putting a lot of risk into the portfolio or investing in the stock market. That helped fuel the stock market higher, right? So we've got CDs.

DAREN BLONSKI CFP®: You say, hey, I go to the bank. I want to be in a CD. In theory, a CD, as long as it fits within certain thresholds, is FDIC. FDIC is, it's the Federal Deposit Insurance Corporation. That's what protects your money in the event of a bank going bust.

DANO WEIR: And I actually did some research on this because there's just like so like who wants to do an episode on CDs? It's so funny. But because of the high interest rates, these are not only in vogue, but they're being considered when they weren't previously.

DANO WEIR: So CD is short for certificate of deposit. This is a concept that in America dates all the way back to the 1800s. And actually, it goes back even further into the 1600s in Europe.

DANO WEIR: You actually in some cases. Can get a physical certificate still from certain banks if you ask for it. But the way that it used to be is you'd show up and you'd say, I'm going to give you my money. I'm going to give you $100. You would give me a certificate that was pretty.

DANO WEIR: And then the bank at the end of it would give me more money than what I originally gave them, right? That's the basic concept of the CD. And the percentage that you're talking about, the rates that you're talking about is what your return is.

DANO WEIR: What you're talking about, the FDIC, they're now seen, CDs are seen as, quote, a safe investment or perhaps a no risk, according to some people, but your words, and I agree, low risk.

DANO WEIR: The FDIC didn't even insure them until 1933, and credit unions that offered CDs didn't insure them until 1970. So they've been around for a long time, but they've really only been, quote, safe since this FDIC insurance came around.

DAREN BLONSKI CFP®: Well, what was hugely interesting, and we just learned this in the past couple of years, is... Everyone thought there were certain thresholds in which the FDIC would step in and would insure. So it was $250,000 in your account.

DAREN BLONSKI CFP®: If you had more, that wasn't insured. And the idea of that was to stop people from doing a run on the bank. So if you hear that the bank of Dano is going under, you're going to go and start knocking on the door.

DANO WEIR: We're having a hard time, but we're going to pull through.

DAREN BLONSKI CFP®: Right. So if exactly, and you'd say that, and that kind of give people some nervous. Nervous energy. And so they go, Hey man, I want my money back. And so if a whole bunch of people ran on that bank at the same time, well, because we have a fractional reserve banking system where not all that money's actually in the bank, they don't have all that money to give the people who want their money back.

DAREN BLONSKI CFP®: In fact, that's what we saw with Silicon Valley Bank and first Republic, a little bit more complex with first Republic, but Silicon Valley is a perfect case of a modern day run on the bank where a bunch of people in private equity, et cetera. Used technology to withdraw a lot of money really quick out of the bank.

DAREN BLONSKI CFP®: And the bank was like, oh, where do we get this money? We don't have all this money. And they had to go into their reserves. It just happened to coincide with a period of time when their reserves, well, they lost a lot of money because they were in bonds and interest rates were going up. That's another episode. Yes. But long story short.

DANO WEIR: Another episode.

DAREN BLONSKI CFP®: Long story short, what you've got here is this issue with, now we don't really know how much is insured because- The Federal Reserve stepped in and they backed every dollar in those banks because many, many accounts had way over $250,000. In fact, one of my family members, his business, he told me specifically, Darren, and this is the weekend of Silicon Valley Bank collapse.

DAREN BLONSKI CFP®: He's like, I've got $400,000 of my operating cash for my business in Silicon Valley Bank. I don't even know if I'm getting it all out on Monday. He ended up getting it all out and it ended up getting backed because we learned in 2008 through Lehman Brothers. That it's not a great idea in a modern economy for the Federal Reserve or the banking system.

DAREN BLONSKI CFP®: And the feds go, sorry, because that creates this whole process and things fall down. So in this case in 2022, the feds stepped in and they backed it even further. So we don't really know how backed it is or how backed it isn't. I mean, they tell you the 250 and there's some other complications to that that makes it maybe more for your situation.

DAREN BLONSKI CFP®: But long story short. There is federal backing to protect you people from running on money. Now, here's the thing that most people don't get. A Money Market is not FDIC insured. Okay. So then you go, well, isn't the Money Market more risky? Well, the interesting thing about a Money Market versus a CD is a Money Market is in, it's actually investments.

DAREN BLONSKI CFP®: It's what we call a 40 act fund and meaning it's a mutual fund. And then it's backed by assets that are actually in that fund. So the whole design of it is to say, hey, if you put a dollar in, we're going to keep a dollar's worth of assets in there. And they're generally really short-term securities, bonds, treasuries, et cetera, treasury bills that are maturing very quickly.

DAREN BLONSKI CFP®: So there's not going to be a lot of variation in it. So in theory, it's a different type of security. Now, to understand how money markets work, we have to go way back in history and understand why they were even invented in the first place. So remember I said that financial institutions are fundamentally a manufacturing business. Their job...

DAREN BLONSKI CFP®: Is a manufacturing business is to sell product, financial products, to get you and your hard-earned money to move into a mutual fund, a stock, a bond, make commission on the way in, and that's how they pay for their institution. Now, things have changed a lot. As you well know, we're a registered investment advisor.

DAREN BLONSKI CFP®: We're a fiduciary to our clients. We're not out pushing product on them, but there are still a lot of brokers out there that are doing that. So what the mutual fund industry said is, how can we get all this cash that's in banks? Out of banks and into our mutual funds. It was a genius invention.

DAREN BLONSKI CFP®: In fact, they said, you know what we'll do? We'll do something that's like a CD and we'll call it a Money Market. And then what we'll do is we'll encourage people to move money into these money markets and then we can move them to these stock and bond and mutual funds where we make more money on their money.

DAREN BLONSKI CFP®: And it was smart because people say, well, shoot, you're going to pay me a little more interest on that Money Market. I'm going to move out of my bank. It's only paying me this. I'm going to move over here. And then that broker would say, well, you can buy this over here too.

DAREN BLONSKI CFP®: And then it's that graduated sell, right? Well, the banks didn't like that. And they said, well, hold up. Time out. We'll create our own money markets too. And we'll compete with you because we don't want that money moving out of our bank.

DANO WEIR: And this is in the 80s, right? Correct. Yes.

DAREN BLONSKI CFP®: So lots changed since then. Lots evolved. So it used to be that money markets. Were actually an invention of mutual fund companies to move money out of banks. And then they would get further invested from there. That has changed and it's evolved over time. Now, most money markets are proprietary to the institution in which you invest in.

DAREN BLONSKI CFP®: So for example, if I go to Fidelity, Fidelity is going to have their Money Market and Schwab's going to have their Money Market and Wells Fargo is going to have their Money Market fund and it's proprietary. So if you ever try to move money out of that particular institution, you're like, hey, you can't transfer that fund out because those money markets are.

DANO WEIR: You would have to liquidate it and then take the cash and buy something else.

DAREN BLONSKI CFP®: That's right. Now, money markets can be a great tool, especially in a rising interest rate environment because they're getting reset as the interest rate, the Fed rate goes up. Whereas like a CD, you're locking it in, right? So a lot of people like money markets in a rising interest rate market and really a great product over the past couple of years for people who wanted to make more interest.

DAREN BLONSKI CFP®: But that usually comes to an end. Feds don't usually, the Fed doesn't usually raise rates and keep them high very long. In fact, that tends to slow and drag the economy down. The problem is when the Fed raises that rate, there's always a lag. It's generally nine months to the impact of raising that rate.

DAREN BLONSKI CFP®: And so in 2022, when they just jammed rates up so fast and into 23, there's a lag. And that's why you hear Fed President Chair Powell say, well, there's a lag and they're long and variable. And so we don't really know what the impact is. So you want to invest when interest rates are going up. This is not advice.

DAREN BLONSKI CFP®: But you want to invest when you're going up, but then lock in when rates start to top out. It's anybody's guess if they're topping out. That's when you lock into CDs, because CDs will lock for a duration of time. Now, one of the other key differences between money markets and CDs is that money markets are generally fully liquid, right? You can liquidate them without a penalty or cost.

DAREN BLONSKI CFP®: A CD, there could be a penalty or cost to liquidating if it's not to maturity, right? Because really what you're doing is you're making a bet or you're making a contract with the bank. You're saying, look, you can have my million dollars. And you can hold it for one year. And in return, you're going to give me X in interest rates.

DAREN BLONSKI CFP®: And then when you give me that money, then in addition, I'm going to give you, when the CD matures, they're going to give your money back plus that interest. Well, if you break the CD, we call it breaking a CD, then you're likely to lose your interest and maybe some more, just depends on whatever that contract is. It's breaking literally a contract with the bank.

DANO WEIR: Now we're looking at an isolated scenario here. I want to take a step back to a 10,000 foot view where someone would be interested or where either of these products would make sense. You're not necessarily saying everyone should go and do this. In fact, what would be the case or what type of scenario would you use one of these versus risk assets or something else?

DAREN BLONSKI CFP®: So yeah, like obviously we can't be like, hey, you should do this on a, you know, something that's being broadcast to people. We have no idea who's listening to this. So this is not advice, but generally saying, you know, CDs and money markets are conservative things.

DAREN BLONSKI CFP®: So we like to tell individuals that, hey, your emergency fund, you know, that six to nine months or three to six months, however you define your emergency fund is a great place for a CD, a great place for money markets, because there's not a lot of risk there.

DAREN BLONSKI CFP®: Now, in the 80s, when they first created mutual funds, or not mutual funds, money markets, in the 80s, when they first created money markets, they used leverage in them. And so what that meant is they were kind of making bets on the money that was going in there. They weren't being as thoughtful about making sure that for every dollar deposited, there's $1 of assets in there.

DAREN BLONSKI CFP®: There might have been more or less. It depends. And there was a lot of regulation on money markets. And when that happened, we started seeing something called breaking the buck. Right. And we saw it happen a couple of times in history with a couple of different money markets.

DAREN BLONSKI CFP®: And that is when someone actually wanted their dollar out of the Money Market, it wasn't fully there. And we're talking like 98 cents on the dollar, 80 cents on the dollar. Not potentially crazy shifts, but certainly impactful when people thought that was safe money.

DAREN BLONSKI CFP®: Now, since, you know, in recent history, there's been a lot of regulation put in place that makes those money markets, quote unquote, much safer because they're not. Really using the same leverage and they have one-to-one requirements. There's a lot more regs in place to keep that intact.

DANO WEIR: So we've got two alongside of one another. We've got a CD. We're talking about, let's say it is a $10,000 emergency fund. We've got a CD that's paying 5% and we've got a Money Market that's paying 5%. For someone who's followed us this far, tell me the differences again. The CD is...

DAREN BLONSKI CFP®: A CD is a contract with the bank that has a penalty if you break it. Before the maturity.

DANO WEIR: With the timeframe.

DAREN BLONSKI CFP®: Timeframe.

DANO WEIR: So this is going to pay me 5% in 12 months or in six months. That's right. The Money Market is fully liquid.

DAREN BLONSKI CFP®: It's fully liquid. It's going to be an annualized rate of return, right? So if you only keep it in a few days or whatever, you're going to only get that annualized return on it divided by 365 days.

DANO WEIR: So both are going to quote in this scenario, pay 5%.

DANO WEIR: But one is guaranteed going to pay 5% in 12 months, and the other might change tomorrow. The rate might change tomorrow. It might change in two months. You're not sure.

DAREN BLONSKI CFP®: You're not sure. Could go up, could go down.

DANO WEIR: And so that's the benefit. What you're getting when it comes to liquidity, you're taking the risk of that the rate might actually drop.

DAREN BLONSKI CFP®: That's right. That's right. And the thing you have to keep in mind, though, and you can't ever say the G word. Like, you know, there's cuss words, and then there's cuss words. And in our business, the G word is the big.

DAREN BLONSKI CFP®: Cuss word which is guaranteed we don't say it right because in theory you could have a contract with the bank that says hey here's my million dollars pay me five percent on it over a year and that bank fails in theory you could lose that money potentially so that's so that the the focus of the.

DANO WEIR: Episode what are some of the risks so the the risk is that the bank that you get the cd from could fail right and that the government could not step in and back it even though as you just discussed Even though it's supposed to be $250,000, the government stepped in anyways. And so maybe it is more than that, but maybe they won't, maybe they will. That's the risk. We don't know. Okay. What are some more risks?

DAREN BLONSKI CFP®: So you've got risk of the institution, risk of the government doesn't back it. There's also something called opportunity loss, which I think is the biggest risk, right? So a lot of people say, well, I'm getting 5% in my Money Market, but the stock market's returning X, Y, or Z, right?

DAREN BLONSKI CFP®: So there's what we call the risk curve. In this world. And so in theory, you should be with more risk, you get more return. In theory, that's how the risk curve works. That's not always how it works, especially right now, because we have something called an inverted yield curve. Okay. An inverted yield curve.

DANO WEIR: I can't wait for you to explain this to me because you've said it to me so many times and you're like, oh yeah, well the yield curve is inverted. And before I worked here, I was just like, oh yeah, I'm ready.

DAREN BLONSKI CFP®: You're ready.

DANO WEIR: What does this mean?

DAREN BLONSKI CFP®: So in the world of investments, in the world of predictability, we operate as a financial firm giving out financial advice in the world of probabilities. That's how we play our game. It's always about measuring probabilities and risk, right? So we're risk managers first and foremost.

DAREN BLONSKI CFP®: In the world of probabilities, there is one indicator that if it inverts, statistically within 14 months, the economy is in recession. Now it's 14 months is the average. Sometimes it's longer, sometimes it's shorter. It just depends on what the situation is. That is the yield curve.

DAREN BLONSKI CFP®: We inverted back quite a few years back now. I think it was August of 2022, if I'm not mistaking, when it did its first inversion. And we've been inverted since and technically haven't been in a quote unquote deemed recession. Now we... We can argue that all day long.

DAREN BLONSKI CFP®: And I'm sure people who feel differently about the economy might have something to say about that, but it's very debatable. But the idea is that if the yield curve inverts, statistically, we're going to be in a recession within 14 months. Now, what is a yield?

DAREN BLONSKI CFP®: Thank you if we think about debt instruments so debts bonds right bonds are how we build our roads our schools our cities our institutions right it's i'll give you this money Dan for a period of time you're going to pay me interest on this money and at the end of that period of time you're going to give me back my money and my interest bonds are sold by the government they can be sold by the government they can be sold by corporations you municipality governments kind of like a cd it's not like a cd because a certificate deposit actually has some insurance to it you still have but i'm still you're still giving money and promising me they're going to give x more in at a later day that's right okay right so that's what a bond is so cd in theory you could kind of say it's that but for sake of like not putting everyone to sleep i won't go into all the details right so you bonds if you think about it they have what's called a duration or the way to think about duration is just time to maturity when you're getting your money back is the lay way to think of that okay so we have some bonds that mature in a day in a week in a month and it depends when you buy them because you can buy them halfway through meaning i can buy a bond for six years and three years into it say i don't want this bond anymore I'm going to broker it onto the market.

DAREN BLONSKI CFP®: That's how brokers make money. And they make money on the spreads. Dan's going to pick up my bond so he can hold it for the rest of the three years. So there's a varying time to duration.

DAREN BLONSKI CFP®: Well, in theory, that yield curve says, well, if you buy a really short two-duration bond, a three-month treasury, it's going to have X yield. Now, if I buy a 10-year treasury, which is further out the maturity, then in theory, I should get more money because I'm taking more risk.

DAREN BLONSKI CFP®: If my money is going to get tied up for 10 years versus three months or two years versus a 10-year maturity, I should get paid more for that risk because my money's being tied up. So there's this weird phenomenon in the world of interest rates where when the feds move rates really fast, really high.

DANO WEIR: That the long-term bonds don't actually catch up with the short-term and that's what happened in 2022 we started raising rates really fast and when that happened that inverted the yoke curve meaning the short end of the curve the short rate was actually paying more interest than the long end of the curve okay so if you're listening to the podcast we're in our conference room in sonoma off the sonoma squares at Sonoma Wealth Advisors i'm looking at the screen and the screen has a graph which at year zero you has a red line yielding 2% and has a blue line yielding 1 plus 1.25%.

DANO WEIR: Then by year five, those two have switched. So now the short-term bond, right, so the bonds that I would take out that are only three or six months are actually paying 2.25, and the long-term bonds are paying closer to 1.5. So that's what you're saying.

DAREN BLONSKI CFP®: That's an inverted yield curve. It doesn't make any sense logically because why should you get paid more for less risk?

DANO WEIR: So why did it happen?

DAREN BLONSKI CFP®: Because the Fed moved rates so fast that the market wasn't able to reprice the long end of the curve.

DAREN BLONSKI CFP®: Right? So what that does is that automatically, and there's lots of theories about this, but what effectively it does is it incentivizes people to take less risk.

DAREN BLONSKI CFP®: Meaning if you're going to buy a building. I'm not going to tie my money up with you for 30 years to buy. Here's my money. Build that building because you're only going to give me one half percent on that 30 years. But I can get one half percent on three months, six months. Now it's an annualized number, but it's still a better deal for me. So it starts incentivizing the economy to take less risks. That's one theory.

DANO WEIR: And this also seems like it would feed itself then. So then once it's crossed. Now, let's say your new bond investor walks in. Well, you had nothing to do with what made the scenario, but the short-term are paying this and the long-term are paying this.

DANO WEIR: Why would you ever buy long? And we're just doing what... So then it starts sort of starts... So it almost like, well, never, never shall the two meet again unless something regulatory or something really acute were to push them back across.

DAREN BLONSKI CFP®: Well, if you think about it too, what's happening is the Fed's raising those interest rates really fast. And...

DAREN BLONSKI CFP®: When interest rates rise really fast, people take less risk, right? Let's say you're a home buyer. You want to buy a home. Well, a couple of years ago, you could have got 3% rates. Now you're staring at almost 7% rates. What are you going to do? You're going to reconsider that house purchase. You wanted to move to that new house down the street because it was beautiful and had the pool and the gazebo.

DAREN BLONSKI CFP®: And you're like, I don't think I want to pay 6%, 7% for that home when I could have had it. For 3%. So you have a recency bias. You think rates should be lower. That stops economic activity. Because if you think as consumers, what's our biggest form of consumption? It's our homes, right? Everything we put in our homes, that costs money.

DAREN BLONSKI CFP®: So if you stop people from moving because they don't want to buy a new house, guess what they're not also doing? They're not filling it full of plastic junk that's going to continue to push the economy. So that has an impact and it reinforces to your point, it starts building on itself. The reason we haven't... I don't think slipped into recession quote unquote yet.

DAREN BLONSKI CFP®: Cause we could argue that too, but the reason we haven't slipped into a deemed recession is because our comp or the reason we haven't slipped into recession yet is because the government is doing something called deficit spending. What that means is they're spending to oblivion and printing money. And what that does ultimately is it's unsustainable. They can't do it forever. We just don't know when that break point is.

DANO WEIR: So speaking of the government, so I want to go back to my scenario with the $10,000 and the CD in the Money Market. So clearly right now in America, as we're recording this, it's late July 2024. The election is weeks away.

DANO WEIR: Joe Biden has just dropped out of the race. So there's a lot of uncertainty politically. So with regard to, there's a lot that that implies, but with regard to interest rates and returns, In my mind, my impression now, just kind of being a guy looking at the situation, a Money Market's paying 5%, but that rate can change tomorrow and it's fully liquid. Cds are also paying 5%. In my head, there's part of me that's like, yeah.

DANO WEIR: Maybe jump, maybe put that in that, that money that I would put in one of those instruments, maybe look at a CD right now and lock it in because in the next year, it's probably not going to be 5% in the next year. So when someone's making a decision like that, what are some strategies or what, if I were a client sitting with you and I said that, what would be your reaction? What would be your advice?

DAREN BLONSKI CFP®: Well, it's best not to try and predict first off. And again, saying that we have to go to the world of probabilities. What are the probabilities? Is it more probable that the feds are going to continue to raise rates or more probable they're going to continue to lower rates or they might start lowering rates?

DAREN BLONSKI CFP®: It's probably more probable that they're going to keep rates the same or lower, right? It's not likely the rates are going to go up unless you're in the camp you believe inflation is going to keep going, right?

DAREN BLONSKI CFP®: Because that was why we started raising rates is because they printed all this money during COVID and they're like. Holy moly, we got so much money out there. We got to suck it back in. How do you suck it back in? Inflation, right? So you inflate away the deficit spending, as I just mentioned a minute ago.

DAREN BLONSKI CFP®: You don't know. And that's why you have to have a strategy that allows you to be flexible. So one of those strategies is something called a CD ladder, right? So a CD ladder allows you to diversify your maturities. Right. So in theory, if I have a million dollars, I can divide it up into four parts. I can take $250,000 and I can put what part of that to that million and put 250,000 in a year bond or year CD.

DAREN BLONSKI CFP®: And then I can put another 250,000 in a nine month CD and so forth and so on, always going down. And so what happens is that three month CD, you put $250,000 in matures in three months, then you roll that up to. That 12 month CD. And it just keeps working like that. And that way you're diversifying maturities.

DANO WEIR: And so we're clear the different durations on those CDs have different rates. So the shorter one's not going to pay as much, right. As the, as the 12 months different than bonds, which are actually revert, they are inverted, right. Right. So very interesting there, but that's what you're saying. So you're saying you take a portion of it and you set it at a, at a three, at a three month.

DAREN BLONSKI CFP®: Well, so let me correct you there real quick, Dan, because it's not different than bonds. If you look at the maturity chart on CDs right now, it's flatter than it's been in the last year. But the reason CD ladders haven't been really popular in the last little while is because you had that inversion.

DAREN BLONSKI CFP®: Meaning if I put all my money in a three-month CD, I'm going to get 5%. I'm only going to get 3% in a 12-month CD. So I'm just going to keep putting my money in that three-month CD and keep reinvesting.

DANO WEIR: Wait, so they've been re-inverted too?

DAREN BLONSKI CFP®: Oh yeah. Cds invert just like bonds. So it doesn't matter. So the CD ladder has not been an effective tool, but that could be coming more into vogue now because we're starting to see the reinversion.

DANO WEIR: Okay, so then, okay, so thank you for correcting me. So then even though the year CD is, let's say, 3%, right, and the three-month CD is 5%, so clearly let's just do all three-month CDs, except that maybe in a year. Correct. It will only be 2%.

DAREN BLONSKI CFP®: Correct. And that's the bet. That's the probability.

DANO WEIR: That's the bet.

DAREN BLONSKI CFP®: That's the bet. And that's the risk. And the risk is, if it isn't, say, because I could make an argument that the feds are going to keep rates at 5% for a while or whatever, right? They're going to keep them high. And I call it the slow burn method, right? If you've got a lot of inflation in the economy, raise them up really fast and then just burn it out of the economy. Yeah, roll it.

DANO WEIR: Blow right down. Momentum. Right?

DAREN BLONSKI CFP®: And that's that, quote unquote.

DANO WEIR: You hear in the- The soft landing. Soft landing.

DAREN BLONSKI CFP®: Yeah. Right? So- If they go too fast, though, they risk crashing the economy, the plane going nosedive into the ground. So if they raise it really fast and then slow burn, slow burn, slow burn, we have less volatility.

DANO WEIR: I'm going to ask again, what's the risk?

DANO WEIR: What is the risk of a CD?

DAREN BLONSKI CFP®: The risk of a CD is institution goes under. The risk is the opportunity cost. If you're investing in CD that's only paying you 3%, you can make more money somewhere else. There's a loss there.

DAREN BLONSKI CFP®: The risk is that, I mean, in theory, you could put more money in it and the government's not going to back it.

DAREN BLONSKI CFP®: But I think your biggest, actually your biggest risk really is opportunity loss.

DAREN BLONSKI CFP®: Too many people too often we talk to, they have way too much cash in the bank. In CDs and in cash. They just, because the reality is you're not going to need that cash, right? And they don't correctly manage their cash and they just put a big pile of cash because it makes them feel emotionally okay in the bank. And that's usually a mistake for people and they give up on the interest they could have gained.

DANO WEIR: And this will roll right into a pitch for Cinema Wealth Advisors.

DANO WEIR: That is something that you...

DANO WEIR: A lot of people don't do, which is that you, to what you're saying, they have, they, if they are so inclined or so fortunate, they do have cash.

DANO WEIR: Asking yourself, well, what is this for determining your financial goals? And then once you determine those financial goals, then it helps dictate what the plan actually is. Because if the goals aren't, oh, I need to buy this, this, and this in the next two weeks, then you probably don't need it all sitting there in cash.

DANO WEIR: And you can look at other instruments, whether it's something considered lower risk like cd or whether it's something that's higher risk because you're not going to need that money for a long time but something i found not everybody but something i found in my life is a lot of people don't look at the situation like that yeah so there's a couple pieces there right so scratch.

DAREN BLONSKI CFP®: The hard pitch because i'm not that's not what this is about it's about education right but what i will say bluntly is that you should whether it's You should find a fiduciary, right? And so this explains what the difference is. That's somebody who's willing to say, I'm going to give you advice in your best interest.

DAREN BLONSKI CFP®: If you walk into your local bank, chances are that person is not going to act in your best interest. They are a salesperson there to sell you a financial product. If you walk into your local brokerage, same deal. So find an independent registered investment advisor who's going to literally say, hey, if I was in your shoes, treat you like their grandma, here's what I would do.

DAREN BLONSKI CFP®: And then that you can trust that advice is coming. And at very least they should be willing to share with you any conflicts of interest they have. In fact, the law is now there's a, there's something called the form CRS on every financial institution's website.

DANO WEIR: The client relationship summary.

DAREN BLONSKI CFP®: There you go. Nice job. So the client relationship summary will explain those conflicts of interest in detail. And you should look at that before you talk with any financial professional, right? Then, then once you've cleared that, Hey, this person's going to act in my best interest, then you can start to size out.

DAREN BLONSKI CFP®: To your point, do the plan. Figure out like how much cash do I really need and then have a plan and then that's where you can deploy something like a CD ladder. Like, hey, I just need to know that I have $250,000 coming and available to me every three months. If you know that, perfect, because that'll get you through.

DAREN BLONSKI CFP®: And then maybe you have another chunks in money markets that's fully liquid, right? And so the way we look at it is you have all these different pots of money. Right. And then you want some money that's no risk, little risk, some risk, and it just keeps going up. Well, there's really no such thing as no risk.

DANO WEIR: But anyway, and for the lower end, too. So maybe maybe it's not two hundred fifty thousand dollars for you. Maybe it's five thousand dollars or maybe it's three hundred dollars.

DANO WEIR: You know, it doesn't hurt to look at doing strategies like this, even if the zeros or the digits are smaller, if only to get in the habit of thinking about goals, budgeting and trying to. Push for an upside with your money versus just spend, spend, spend, spend, spend, stack it up, spend, spend, spend, spend, spend.

DAREN BLONSKI CFP®: Fair. And I also, I think it's important to say that don't over-engineer your money too, right? Because I think some people just get intimidated not to do anything because they're trying to over-engineer and they don't want to make a mistake. And, you know, do what's comfortable to start and then keep learning, keep pushing so that you can use these different tools where it makes sense for your financial future.

DANO WEIR: We did an episode on CDs. I almost brought in my high school CD collection. I could have been spinning Third Eye Blind and Blink-182 for you, but instead, we talked about certificates of deposit.

DANO WEIR: This content was produced by Fermata Advisors, LLC, an SEC-registered investment advisor. DBA, Sonoma Wealth Advisors. The opinions expressed by Fermata Advisors, LLC, on this show are their own. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such.

DANO WEIR: Any statements or opinions are subject to change without notice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed.

DANO WEIR: Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for any individual. Viewers and listeners are encouraged to seek advice from a qualified tax, legal, or investment advisor to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.