CD Rates: It Turns Out Slow and Steady Does Win the Race
April 30, 2009
Certificates of deposit will never be confused with glamour investments, but it turns out they have been a savvy choice for the investment environment of the past ten years. It also looks as though they may not be finished with providing pleasant surprises.
CD Rates Look Like Winners Compared to Stocks
For the ten years ending March 31, 2009, stocks (based on the S&P 500) lost money at an average rate of 2.997% per year, for a cumulative loss of over 26%. Over that same time period, 6-month CD rates averaged an annual return of 3.69%. The actual cumulative return earned by an investor would depend on the timing of rollovers, but assuming rollovers at this average annual rate, the cumulative gain would have been more than 43%.
To think of it differently, stocks would have left you with just $7,377 out of an initial $10,000 investment, whereas CDs would have grown that $10,000 to $14,366. If certificates of deposit are boring, it's also true that there are some forms of excitement you can do without.
What About CD Rates Now?
So much for history. What about now? 6-month CD rates are now well under 3.69%, so are they still a good deal?
CD rates may be lower today, but so is inflation. Through the end of March, 2009, the Consumer Price Index (CPI) had actually declined by 0.4% over the prior year. 6-month CD rates at the end of March were at 1.76%. With the CPI declining, those CD rates would put an investor more than 2% ahead of inflation--not bad for a conservative investment.
Not only that, but investors could do even better by choosing longer term CDs, and by shopping around for the best CD rates. So does that suddenly make CDs exciting? No, they are still slow and steady. But, as the past decade has shown, slow and steady sometimes wins the race.
