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Updated on Monday, November 5, 2018
If you thought the growth of stock beats certificates of deposit (CDs) every time — think again. It’s true that over time, an all-stock portfolio will outperform an all CD portfolio. But MagnifyMoney found that there are uncomfortable periods where stocks lose value, often for significant amounts of time, and CD returns reign supreme.
For this study, MagnifyMoney took a look at the returns for a safe investment versus a risky one. We reviewed over 600 months of stock and CD returns to uncover the differences in performance over the past 51 years.
Here are a few key findings from the study:
- 30% of the time, CDs outperformed stocks in any given 1-year window from 1967 through 2017.
- Unsurprisingly, CDs outperform stocks more often during economic recessions, and underperform during economic expansions, although there are some pockets of exceptions.
- CDs had their longest streak of outperformance in 2000-2003 when the 1-year return of 6-month CDs beat the 1-year return of stocks for 33 consecutive months.
- When CDs do outperform stocks, the average length of time is for a little more than 8 months.
- The 1970s and 2000s are the only two decades where the annualized return from CDs outperformed stock.
- How did each investment perform over the full 51 years? $1,000 invested and reinvested in 6-month CDs would be worth $16,200 today; $1,000 invested in the S&P 500, including reinvested dividends, would be worth $140,130.
CDs vs. stocks: Which is a better investment?
No shocker here: An all-stock portfolio earns more over time than an all CD portfolio. To be specific, from 1967 to 2017, stocks outperformed for 438 months while the 6-month CD outperformed for just 186 months. (Check out a table of the rolling 1-year stock versus CD performance here.)
The difference in dollars and cents is where things get interesting. Someone who chose to invest (and reinvest) in stocks 51 years ago could be sitting on a nice chunk of change. A $1,000 investment in the S&P 500 made in 1967 could be worth 865% more than a CD investment made at the same time.
Stocks are the clear winner long term in regards to return, but there’s some nuance when we start talking about stability. Stocks experience a lot of volatility along the way, which could be a bit unnerving for cautious investors. One year your stocks may be up and the next year the value could be in a downward free fall.
During economic downturns, stocks can lose value rapidly. In comparison, CDs stay fairly stable and decline slowly. Take the recession in the early 2000s and the Great Recession for example.
Returns from CDs beat stock returns for 33 months from October 2000 to June 2003. In 2008, stocks saw periods of double-digit losses while CD continued offering a decent return. The stability of CDs in these times could be alluring to conservative investors who are deterred by the possibility of short-term losses.
But data shows that weathering the storm during short-term loss can lead to long-term gains. Outside of economically turbulent times, CDs have done better than stocks in spurts over the last decade. For example, in 2016, there were a few months where returns on CDs were higher. But by the end of 2016, 1-year returns for stocks sat at 12.13% while the CDs earned just 0.30%.
Taking a look at decades as a whole, the annualized returns for stock outperformed CDs for the 1980s, 1990s, and 2010s (up to 2017). In the 1970s and 2000s, CDs faired better. It’s no surprise that CDs came out the winner in the 2000s given the economic events of the decade. During that time, stocks saw an annualized loss of -0.95% while CDs saw a return of 3.30%.
So which is the better choice? This study isn’t a reason to ditch all of your CDs for the greener pastures of stock investing because it seems that’s where all the money is being made. Portfolios made up of all CDs may underperform when compared with stock, but there’s no clear answer on which one is better. Ultimately, each product serves a different function and there’s a place for both in a portfolio. Diversification is your friend. You can enjoy the stability of CDs and the growth potential of stock. Having exposure to each gives you the best of both worlds.
Where should you put your cash?
Choosing where to put your money at any given time will depend on your financial goals. Here are situations where CDs come in handy and, alternately, when stocks may be the way to go:
When to save in a CD
CDs aren’t a savings vehicle that will grow your wealth exponentially, but they are a good choice in certain scenarios. A CD can be a safe savings vehicle for money you need in the near future, for example, if you’re saving for a house, boat, car or another major purchase. The CD has a set rate of interest that you are guaranteed to earn by the time it reaches maturity which makes it reliable.
The trade-off for stability is that you may not earn as much from the account. There’s also a chance that rates can increase after you sign up for a CD term. However, you can use strategies such as CD laddering to maximize your savings potential. CD ladders are when you set up multiple CD accounts that mature at different times.
For example, you could open CDs for 1, 2, 3, 4 and 5 years. After each one matures, you renew it into a 5-year CD. This staggers your CD maturity dates, maximizes interest earned and makes it so money becomes available incrementally in the future when you may need it.
However, you can get charged early withdrawal fees if you take money out of a CD before the term ends. A CD isn’t somewhere you’ll want to put emergency savings that you need to tap into regularly. Instead, a high-yield savings account may be a better place to squirrel away your cash.
When to invest in stock
As evidenced by our study, stock investing can be beneficial long term. It’s generally not a good idea to put money you need access to very soon into stock. Say you’re buying a home a year from now. Investing in stock could be risky. You don’t want to go to get the money you need for your down payment only to find the investment has lost value. A CD can’t lose value; you’re locked in for the rate. The return may not be great, but you won’t lose money.
On the other hand, stock could be a good choice for money you want to put away for 10, 20 or 30 years. An extended investment period can make it possible for you to see the long-term benefit of higher return. Considering the example from the study, if a retiree put $1,000 away in the 1960s, $140,130 worth of stock would take them much further than the $16,200 in savings they would have earned by using CDs. (Are you interested in learning how to buy stock? Check out some beginner tips here.)
The current outlook for stocks and CDs
What’s happening in the market right now? Since 2009, there’s been a relatively long period of rising stock prices. This trend doesn’t mean the bull market is coming to an end and a bear market is right on the horizon, but nothing lasts forever. CD returns have yet to recover fully to pre-2009 (pre-Great Recession) levels. The study shows CD returns are impacted slowly by economic slumps, but they’re also slower to recover after taking a hit.
With that said, CD rates are on the rise, which is something to pay attention to if you’re looking for different ways to invest your money.
From the end of 2013 to 2016, returns on CDs hit a low, hovering around the 0.27% to 0.29% mark. From mid-2016 onward, CD returns have ticked upward past 0.30%. Another indicator that CD rates will continue to increase is the recent Fed funds rate hike in September. The Federal Reserve already raised the Fed funds rate two other times in 2018. Multiple rate hikes are also projected for 2019.
When the Fed funds rate increases, interest on savings accounts and other products generally increase as well. If you’re shopping for CDs, check out some of the best ones with the most competitive rates in MagnifyMoney’s CD marketplace.
MagnifyMoney examined the historical returns of two broad investments: a 6-month Certificate of Deposit, and the Standard and Poor’s 500 index, to determine which asset outperformed over a 1-year time period from 1966-2017. The stock data source for the study is Morningstar and historical CD return sources are from the Federal Reserve and DepositAccounts.com. Disclaimer: MagnifyMoney and DepositAccounts.com are owned by the same parent company, LendingTree.
The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.