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):

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.