High Rate CDs vs. the S&P 500 | Not As Big a Mismatch As You Might Think
It can’t be, right? The S&P 500 outperformed by high rate CDs? “Come on,” I thought to myself. Yet I ran into this article posted last night elsewhere and it really struck a chord with me. Ever wonder why you look at your 401K statement quarter after quarter only to find your balances failing to increase? Yeah, me too. It’s frustrating to be a working person fully committed to saving and investing for retirement only to be in the end robbed of those earnings (and the laughable “matching” funds deposited by employers) by corporate mismanagement, malfeasance, and investment bankers.
If ever you needed a rationalization for being a slap/dash grab what you can when you can day trader, this article will give it to you in spades. The numbers are too horrible to re-count. Read them for yourselves. I simply couldn’t believe what I was reading, but the numbers are what the numbers are.
Re-Posted (with permission) from Kidssavingsaccount.info: High Rate CD vs. S&P 500
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.
Chart One: S&P 500 vs. 6 Avg Month CD
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 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!
Chart 2: Performance Gap, 6 Month CD vs. S&P 500
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 saying you should invest in CDs? No.
If ever you needed an excuse to day trade without ever holding a long term position, now you have one. The world of investing has become a game of grab whatever gains you can when you can. It doesn’t get any shorter than the hourly expiry binary options.
You bring up some good points. One thing time has taught me is that you want to buy into weakness and sell into strength if you are a long term investor. You also want to be into the best managed funds.
I also believe you can time the markets. No you will never pick the top and you will seldom pick the bottom. One only has to sell high and buy lower to enhance results.