High Rate CD vs. S&P 500?

I was wondering how high rate CDs performed against the S&P 500 the other day (yes I have too much time on my hands) and decided to take a look. In truth what really prompted me to start doing a little digging was the stock market nose-dive in March followed by the run-up in prices later in the year this year.

In all honesty I picked an arbitrary start date based on the first web page I ran across with any historical data. That page had data as far back as 1993 so I figured, “Why not start there?” What was not arbitrary was the ending date. I took the ending date as year end 2008, which excludes the recent euphoria and rebound made via the easy monetary policy of the Fed and the Government Stimulus spending program.

I thought that rather than cherry pick the best high rate CD for the period I figured I would just take the average 6 month CD APR from the Federal Reserve databank and compound it into an equivalent annual rate. These days I have been very strong in favor of short term investing, and each day the S&P 500 rises I grow even more short term oriented.

To say the “cherry picked” performance of the S&P 500 vs. the 6 mo CD would be an understatement. Take a look at the wild performance swings of the S&P 500 Index. Based on a cursory look at the chart results I seemed to have picked a favorable starting date for the S&P, as it was on a prolonged upswing in 1993 (fed at the time by historically low rates – at that time – under Alan Greenspan, if I recall correctly somewhere around 3%). One thousand dollars invested in the S&P produced ~$2700 (a compound annual growth rate – or CAGR – of about 5.78%) at the end of the 16 year run whereas the same dollars invested in 6 month CDs produced about $1970 (a CAGR of 4.11%). If you invested in all your money in 1993 in a lump sum you came out ahead but was the additional risk worth the paltry extra 1.6% annual return on investment? I doubt it.

Sadly the more individuals had invested in the stock market (i.e. the bigger your portfolio at the start of the time horizon), the greater nominal suffering they faced during the sharp corrections in 2001 and again in 2008. If you managed to jump in on the lows and exit at the highs then you might have done very well indeed… but does that sound like a long term investment strategy to you? I didn’t think so.

The problem is that when I look at a chart like this I can’t help but think, “yeah, the guy who invested a lump sum in 1993 beat the 6 month CD (sponsored CD link) but what about the guy who invested at any other time period on the chart?” Yeah… I still had time on my hands and off the cliff I dove into the numbers. The numbers are horrifying… HORRIFYING!

Yeah, the numbers are so bad I had to flip the chart upside down! Yes, those are HUGE negative differentials in compound annual growth rate performance.

Basically what the numbers say in no uncertain terms is that if you bought into the market in a lump sum at the beginning of any year after 1995 you’d have done better by just buying a 6 month CD and letting it roll over every six months. For a trained finance guy like me, these numbers are against any financial theory I’ve ever been taught.

Still think long term investing is a good idea?  Yeah, me neither.  Am I advocating investing in 6 month CDs?  No.  What I am saying is that whether by malfeasance or incompetence America’s greatest companies have been run into the ground over the last dozen plus years and should be avoided until the boards of directors and executives are all cleaned out.

Related Topics

• How a High Rate CD Account Can Dramatically Alter Investment Portfolio Risk
• High Interest Savings Account Online Makes Sense

Tags: High Rate CD, high rate CDs, long term investing, s&p 500 performance, short term CDs