Risk Reduction Calculator
This calculator is intended to allow you to calculate how much to put into a CD and how much to put into stocks so to protect yourself against any loss in principal at the time the CD matures.”
Enter the amount you want to invest along with the annual percentage yield (APY) of a certificate of deposit (CD) and its maturity. The calculator will compute how much to put into the CD and how much to put into stocks. By default, the calculator assumes a worst case scenario for the stocks in which all of the stock investment is lost by the time the CD matures. This loss is offset by the earnings from the CD resulting in an amount that equals the initial total investment amount (no loss in prinicipal).
If you invest in a diversified stock mutual fund, the chance of losing all of your stock investment is extremely low. Thus, the calculator allows you to choose less pessimistic worst case scenarios for the stock investment.
Disclaimer: To guarantee no loss of principal in a CD, the CD must be held at a federally insured bank or credit union, and the funds must be under the insured limits. Also, the APY of the CD is not guaranteed to last to maturity if the institution should happen to fail.
CDs/Stocks vs Annuities
Investing in stocks can be risky. Some or all of your principal can be lost. However, with higher risks come higher rewards. Holding stocks in a low cost index mutual fund has shown to be a prudent investment strategy for the long term. Investing in certificates of deposit (CDs) may not return as much as stocks over the long term, but it can be done with no risk of losing money.
Insurance companies advertise annuities, like Equity Index Annuities, that have the upside potential of stocks combined with principal protection (similar to what CDs provide). The problem with annuities is that they are never as good as they seem. There are many hidden costs and restrictions along with caps on performance.
There is a simple way that you can obtain the upside potential of stocks and the principal protection of CDs. That way is by investing in both CDs and in stocks. The guaranteed earnings from the CD may offset any losses that you might experience with stocks. This requires you know how much to put into a CD to offset the potential loss from the stock investment.