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Comparing Total Returns of Top CD Offerings with an S&P 500 Index Fund Investment


Many financial planners will stress how important it is to invest in stocks for long-term growth. If you’re going to invest in stocks, you will have to be prepared for risk and volatility. We saw this back in 2008 and 2009 when stocks plummeted. You may not want to invest all of your savings in CDs, but for the part you want to keep safe, CDs can offer reasonable gains without any risk. And if you use DepositAccounts.com to find the best deals, your CD returns can be improved without any additional risk.

Last December I thought it would be interesting to compare an investment in select leading CDs featured on DepositAccounts.com with a stock market investment. A chart was generated to compare these two investments starting around the time when this blog started in January 2006.

The first investment was $100,000 in the Vanguard S&P 500 Index Fund. The indicated performance includes appreciation and dividend reinvestment. Note that for the sake of this analysis, it is assumed that the investor held only this single index fund throughout the time period.

The second investment was $100,000 in select CDs. Instead of using past average CD rates, I chose CDs that were nationally available, had top rates, and were featured prominently on DepositAccounts.com at the time. For simplicity sake, the first CD I chose was offered at Patelco Credit Union in January 2006. It had a 5.00% APY and a term of 12 months (I could have also selected a longer-term CD with a reasonable early withdrawal penalty or a more liquid savings or money market account with comparable rates and achieved similar results). At the 12-month mark, the PenFed CDs with a 6.25% APY became available, and many of our readers jumped on the opportunity. Consequently, the second CD I chose was a 7-year PenFed CD with a 6.25% APY. This 7-year PenFed CD would have matured at the end of last December. To continue this comparison, I had to choose another CD, and PenFed made it easy with its CD specials that came out last December (another one that many of our readers jumped on at the time). One of those CD specials included a 7-year CD with a 3.04% APY. That is the CD used to cover the period from January to the present time. Below is a summary of the three CDs used for this comparison:

  • Jan 2006 to Dec 2006: 5.00% APY 1-year CD at Patelco CU
  • Jan 2007 to Dec 2013: 6.25% APY 7-year CD at PenFed
  • Jan 2014 to Jul 2014: 3.04% APY 7-year CD at PenFed

Note that each of these CDs was nationally available and well featured here at DepositAccounts.com at the time. By being more active than the investor in the above example and by utilizing other local CD deals, special promotions and bonus offers, and reward checking accounts, the savvy deposit accounts investor could likely even beat these returns. In fairness, though, if one’s timing didn’t line up to invest in the 7-year Penfed CD at the time, one would have had to work harder to match those returns, especially in the latter two years of the 7-year term.

With the above disclaimers on each of the two investments, the chart below compares the returns of the above CDs with the Vanguard S&P 500 Index Fund (including dividend reinvestments) over the course of the approximate life of this blog – from January 2006 to June 30, 2014 (end of most recent quarter):

Stock market vs CDs

Since the last comparison in December, the S&P index fund’s lead over the CDs has grown. Without any significant stock market corrections this year, the index fund performance has been strong. The CD investment is growing more slowly than it did in previous years due to the maturing in December 2013 of the old high-rate CD. The new CD rate is less than half of the old CD rate.

Even with the big stock market gains over the last couple of years, the total return of the CD investment is pretty close to the stock market investment. The primary difference is that the CD investment only grew and never placed capital at risk. The value didn’t plummet like the S&P index fund did in 2008 and 2009. Additionally, most people will not have been able to match this type of market performance (a steady hold of VFINX), although in fairness, only the attuned CD investors or active deposit accounts investors will have been able to match this CD performance.

The stock market may continue to lead the top CDs for several years to come, but stock market downturns will inevitably occur. Those downturns may not be as severe as the 2008-2009 downturn (or they may be worse), but the downturn may be large enough that the CD investment will take the lead again. Even if the CD investment never again takes the lead, though, at least the CD investor can sleep at night knowing that the CD principal is federally-insured and never at risk of plummeting in value like the stock market investment is.

For those dedicated deposit investors (and those who participate meaningfully both in the market as well as in deposits), what has been your experience over this time period? Which investment do you think will perform better over the next 8-9 years? Please share your experiences and opinions in the comments section below.

  |     |   Comment #1
I basically agree with your analysis I think that the issue of taxation must be considered.
Long term capital gains are taxed at a maximum rate of 15%-----C/D interest is taxed
at your regular rate (as high as 39%).
However,sleeping well at night IS very valuable--perhaps the correct approach should
be a base of C/D's combined with stock investments to try to keep up with long term
Please keep up the great work that you do.
  |     |   Comment #2
Excellent topic. The only thing I would add is that financial planners often do not clearly spell out the impact that fees, commissions and expenses have on the return figures cited. Even in the case of Vanguard, known for its low fees, the fine print in one fund I recently looked at said that the returns cited included return of capital; i.e giving you back your money! When I analyzed the annuities recommended by the planner about half of the payout figure was return of principal! Bottom line: after a lot of research I have concluded that if you look at the real (i.e.net) rate of return and the level of risk you are taking, a competitive CD is a much better option. And for CDs you can't beat Depositaccounts! 
  |     |   Comment #3
I like to sleep at night, too!  My goal is preservation of capital and has been for 20+ years, i.e. return of principal rather than return on principal.  Very conservation CD person and didn't lose a penny in any down period.  Perhaps those DA "younger" persons have different goals...but if one has no debt, "good" Soc Sec payments, etc. live within ones means...all CDs are merely "for the future" if needed.
  |     |   Comment #17
To #3, 
Do you realize that a 20% stock allocation is less risky over time than a 0% stock allocation? Bonds/CD's have various risks, too.
Not losing a penny ever is kind of overrated. 
  |     |   Comment #4
Agree with #1 and #2.  As #1 said, after tax is definitely a consideration for individuals to factor in (and can obviously vary widely based on one's other earnings).  If you're in the top income bracket, you have to factor in the meaningful tax gap between the two alternatives. And on the flip side, as #2 said and as you alluded to in the article, Ken, the REAL fees/expenses/etc. that the average stock market investor experiences would far exceed the steady buy-and-hold VFINX investment with negligible fees that you showed above. While some stock market investors no doubt beat those stock market returns you showed, the vast majority would fall short of that due to fees/commissions/etc., I believe.    
  |     |   Comment #21
no reason why the average investor couldn't have bought VFINX, then would get low fees 
  |     |   Comment #25
I agree with that statement, of course, but 'could have' vs. 'actually did' are two different things, as you know.  I haven't looked around in a while, but I think a large number of studies have been produced over the past 10 years or so showing how the average investor has done much more poorly than if they had simply gone with the approach that you and I agree they could have, but didn't, take vis-a-vis VFINX or similar low-cost index fund.  
  |     |   Comment #5
This was a well written and thought-provoking analysis.

With that said, it should be noted that comparing CD returns with S&P 500 returns is like comparing apples to..........****drivers.

Any good financial planner will tell you that CDs and stock market index funds should be used to fill different needs in an individual's portfolio.  Both may be right for some people, while others should only have CDs (or other cash equivalents).  Others, still, need the potential inflation-beating long-term growth that only the stock market can provide.

Rather than focusing on return, financial planners will tell you that it is more important to focus on what you investing goals and needs are and then back-fill the investments/CDs to meet thatose goals.

As a general rule, people who need their money for a specific goal that is within 5 years away should NEVER invest that money in the markets.  The same is true for one's emergency funds.  The potential volatility breeds too much uncertainty.  However, for those people who are funding a long-term goal (such as retirement) that is 10-plus years out, the inflation beating growth potential of the stock market is needed.  All of your money may still be there in your CD, but after inflation, how much stuff will your money still buy?

Thanks again, Ken, for the wonderful article.  I truly enjoy numbers-crunching such as this.  However, it is my belief that the information should be taken at face value. It would serve readers well to make sure they have a deeper understanding of why they are investing either in a CD or an index fund, and then make sure the choice meets the goals.  Chasing returns or avoiding principal fluctuation when used in the wrong context can be dangerous!
  |     |   Comment #6
Excellent article!  I personally believe that the returns of DA featured CDs will beat the returns of the stock market for at least the rest of this decade.  I do think the point raised about the differing rates of taxation of the returns is an important one, though. Ken, could you do an analysis that takes this factor into account?  Thanks for all of your great work!
  |     |   Comment #7
Fascinating!  Something similar but looking at the year 2000 would be a cool comparison also.

How about comparing the 30 year TIPS market to the indexed s and p 500 index fund.

I think the point of the excercise is to show one is taking a lot of risk with volatility with the stock market if held for a short period of time.  I would assume in all 30 year periods of history one would be better off in the stock market.
  |     |   Comment #8
I don't think all 30 year periods would be better with the stock market.  It all depends on when you start and when you end the thirty year periods.  A thirty year period ending in 1931 would not result in the stock market beating deposit accounts (although there were no CDs then). 
  |     |   Comment #10
So then, the stock market won.
  |     |   Comment #11
Look at the thirty year period ending in 2008.  The stock market didn't win this one.
  |     |   Comment #18
um, what??
look at 1978-2008, stock market did pretty well!!
  |     |   Comment #9
Remember the 90's when Glassman, Orman  and many others were telling us on CNBC or KNBC that there never was a rolling 10 year period that the market has lost money. Well they have not saying this for quite a few years. I think there is no choice between not loosing money and making at least some money and sleeping nights.  Thanks Ken. 
  |     |   Comment #20
yes, but this was a stock market bubble and at the time no one wanted treasuries.
  |     |   Comment #22
True.  All a person has to do is look at past history.  Stocks, bonds, and treasury rates all go in cycles.  The problem arises if you own too much of one of them and have to sell at the bottom of their cycle.  Or if you live long enough to recover from a long bottom market.  A 50% loss requires a 100% gain just to break even.
  |     |   Comment #12
I began saving money back in the 1970s.  Since the near implosion in 2008, the current market trends are vastly different from decades past.  Up until 2000, the market clearly beat any bank deposit returns.  My parents in their working years (1960s up to the mid-1990s) never put one cent into the market and only to bank products.  Their retirement deposits, while never losing money, did not match the market returns over their working years and they ended up with a much smaller amount of money when they retired.  I have, for the most part, placed the majority of my money in deposit products.  I do not expect any major interest rate adjustments given the present situation.  I still place money into the market (401k, IRA) which I have not moved despite the market downturn in 2000-2002 and 2008-2009.
  |     |   Comment #13
It is all about timing on when you invested and when you got out.  You can get different results on both sides of the fence just by picking which time frame you want to look at.
  |     |   Comment #14
You are absolutely correct, which makes short-term comparisons (i.e. less than 10-20 years) very suspect. Retire at the top of a bull market and watch what happens to a 401K when it gets it by withdrawals and an ensuing bear market that eats at it like cancer.  In contrast, many retiring into a bull market often see their balance grow each year while they merrily make withdrawals as they fly first class to their favorite getaways. They say you can't time the market but, in the end, timing is everything.  
  |     |   Comment #15
This is why the stock market can be so dangerous.  When stocks are expensive, as they are now, the tendency of markets to revert to the mean leaves stock market investors in a very vulnerable position.
  |     |   Comment #19
yup, agree.
tough time for new retirees now
  |     |   Comment #23
Timing is everything and just plain luck makes the difference between being financial secure or being a popper.
  |     |   Comment #16
I got the green line Ken , thank you .
  |     |   Comment #24
If you arbitrarily picked 2009 rather than 2006 then the graph would look very different and the other commenters might not feel so happy about their choice to stick solely with CD. It's more enlightening to do a Monte Carlo type model that does a comparison starting with every year. I did invest in CDs but I also invested in the market in 2009 and rode up about halfway up the incline. With stocks at a near record I'm waiting for the next eventual drop so I can repeat the process.
  |     |   Comment #26
Two 62 year-old retired married adults...

We have a 250K CD due in 538 days (yes, I track in detail). If the market has significantly "corrected" and I sense a "bottom" or the beginning of a "bull" market, I'll probably put the money in one or two index fund(s). We may never need the money, we may need it in 10-15 years, we can afford to lose it and index funds are more "liquid" than CD's with painful withdrawal penalties.

If, however, the same scenario develops and CD rates are above 5% we may opt to stick with CD's for safety. However, only long-term CD's (7-10 yr) pay the interest I want and they come with potential penalties. Regular CD's have withdrawal penalties while brokered CD's carry market pricing risk. Liquid, yes. Pain free, no.

Perhaps we will revisit a time when you could walk in to your local bank, plop down 200K and earn 5% on a 1-2 year CD. That isn't today, tomorrow or next year. Last year, we put 400K in 10-year brokered CD's at 3.3%; I ladder/invest the interest every six months. In nine years when the brokered CD's mature, we'll have to decide what to do with the 400K principal. A nice problem to have but still a problem. More CD's, stocks, index funds, pure cash, or monthly checks to the old folks home!

We have a combined annual income stream that allows us to increase savings each year which means we do not depend on investment income. Your investment mileage will inevitably vary. 
  |     |   Comment #27
"We have a combined annual income stream that allows us to increase savings each year which means we do not depend on investment income."

Unless you are investing the funds to leave to your heirs, in which case you could begin gifting the funds to them, start spending it on yourselves or set-up a scholarship fund, for example. There are always nice things people can do if they have the "problem" that you do.
  |     |   Comment #28
In this low interest rate environment for a retiree,  the simple question is can I make it with low cd interest rates for the rest of my projected lifetime or do I have to risk it in the market to get a anticipated needed rate of return?  I use a simulated financial spreadsheet that shows all my projected expenses, inflation, taxes, and earnings through my estimated life expectancy of 90.  For example, I can put a cd rate of return of 2% or 3% and my spreadsheet will tell me what age I might or might not be in the red.  I suppose if it told me that I needed a higher rate of return, I would probably adjust my expenses and if that did not do the trick then I would maybe invest a little in the stock market and go back to work until the time my financial situation improved.
  |     |   Comment #31
good points, Ken! Let's do this comparison again after 5 years and see how the stock market and CD performance turned out to be :) by then the blog would have passed its 10th birthday :)
  |     |   Comment #32
This was just the type of comparison I searching for the other day.......thank you
  |     |   Comment #33
Ken, thanks for the thought-provoking analysis. in my opinion the timing of the CDs in the comparison is too optimistic to resemble the strategy of even a sophisticated CD investor. The majority of the return in your analysis results from the 7-year, 6.25% CD. I've been a reader of DA/bankdeals blog since approx. 2007 (thanks for all your hard work). I remember that CD rates (and inflation) were rapidly rising at the time. Short and long-term CDs were all around 6%. Someone who decided on the 7-year CD would have had the foresight that rates were not going to rise further, and (perhaps more importantly) would be much lower over the next 7 years. I didn't quite have the foresight, so I laddered my ~6% Penfed CDs at the time with 3, 4, and 5 year maturities. I still think this was a reasonable decision at the time, but the matured CD funds have been sitting at 0-1% rates for several years until the 3% Penfed CDs came back, so I wouldn't have quite matched the impressive growth in your example.

My prediction for the future? The economy seems to be slowly but steadily improving, so interest rates will probably keep rising slowly. Interest rates and stock prices don't seem to move in a typical fashion for an economic expansion (yet). Stocks may already have the full future extent of this bull market priced in, or maybe not. Inflation may come back due to the artificially low interest rates. So as a trend over the next several years, I expect higher interest rates and maybe lower, maybe higher stock valuations. Once we reach sufficiently high interest rates, I think long CD maturities will make more sense again (and the probability of further stock market gains becomes smaller). My guess is that it will take 2-4 years for rates to rise back to that level. Waiting to invest in a 5-year CD for that time of peak interest rates could be a decent 7-9 year strategy. The biggest issue, like in 2007, could be that it will be difficult to forecast inflation. Inflation-indexed bonds could become an attractive investment. But in summary, I really don't know. One thing I learned in my couple of years of investment experience so far is to not put my eggs all in one basket.
  |     |   Comment #35
ELLOHAY OWHAY REAAY OUYAY!?!?!?!??@?#??$??!@#

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