20 Second Advisor: Should I just put my money in bank CDs?
I’ve been getting a lot questions from clients on if they should keep their funds in their portfolio or just take it out and put the funds into a bank CD (now paying 4-5%). To me, the question is all about time horizon. Stocks have a much higher expected return (around 10% over the long haul) whereas bonds and/or CDs have a lower rate of expected return. The problem is that the future is uncertain and there are periods where bonds and CDs have outperformed stocks. For example, from the period of 1966 – 1982 US 1 month treasury bills (ie T-bills) earned a return of 7% while the S&P 500 earned a return of 6.8% over the same time period. For investors during that time period, you had to have been scratching your head and thinking “Now, why do I own these stocks if I could do just as good in government T-bills?” Over the next 10 years (1983-1992), the S&P 500 earned an average return of 16.2% per year while T-bills earned 6.9%. To put this in dollar terms, if you had started with $100,000 in 1966 and invested in the S&P 500 you would have ended up with an average return of 10.2% over 27 years and a total portfolio worth about $1.37M in 1992. If your neighbor had invested in only T-bills over the same period, they would have had an average return of 7% and (starting with $100,000) would have ended up with around $621k.
The moral of the story: Stocks “should” return more over the long run. They are riskier securities (compared to bonds) and investors should be compensated for that additional risk over the long haul. In any given year or decade (or longer sometimes), there is no certainty that stocks will outperform other safer securities. My rule of thumb is that if you think you’ll need the money within 10 years, it’s probably best to keep it in cash or CDs or very safe investments. If you have a 10+ year time horizon, then it’s appropriate to consider stocks as part of your portfolio.
Note: Every investor is different and nothing is guaranteed. Past performance is not indicative of future results. If you have a question about your portfolio, you should speak to your financial advisor. Returns in examples above are from Dimensional Fund Advisors Matrix Book 2021.
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