I would venture to say that there are two investment products people learn about before any others – Stocks and CD’s (Certificates of Deposit). Assuming most people learn about these two options when they’re young, I would think the way they were explained was elementary. Something like:
Stocks are Risky and CD’s are Risk-Free.
When the majority of people hear the term “risk” they think it’s the ability to lose money, which isn’t entirely true. It’s this risk-averse mindset that leads people to invest in CD’s.
There is something called inflation that typical
losers CD investors ignore. Inflation, of course, is the general rise in prices of goods and services over time. To oversimplify:
Inflation is why you can no longer buy a coke for 5 cents.
To ignore this important economic factor is a huge mistake most people make.
The ONLY REASON you should ever be invested in a CD is because you need the money for something specific in than 3-5 years. If you need it sooner, put it into your savings account. If you don’t need it for a while, invest in the stock market (not necessarily individual stocks). Historically, stocks have proven to be the best hedge against inflation.
CD’s Make Me Laugh
I don’t actually laugh at CD’s themselves – they are an investing instrument that makes sense at times.
I laugh at people who invest in CD’s because they are the epitome of hypocrisy.
As I touched on earlier, most people place their money in CD’s because they are afraid to lose it (or because they are lazy); however, investing in CD’s nearly guarantees that you will lose money. Now, DON’T MISUNDERSTAND THIS…a CD will not lose money as it is FDIC insured, but YOU WILL LOSE PURCHASING POWER. What good is money that isn’t worth as much?
It is much more visible now that CD rates are extremely low – .4% for 11 months – but this has always been the case, even when CD rates were much higher.
According to Invesco:
After taxes and inflation, CD’s have earned a negative “real” rate of return 11 of the last 15 years.
You can view Invesco’s research here, or you can see the figures below:
CD’s “Real” Rate of Return By Year
(assuming top federal tax rate + inflation reported via CPI)
- 1999 CD Real Rate of Return: 1.21%
- 2000 CD Real Rate of Return: 0.17%
- 2001 CD Real Rate of Return: (0.16%)
- 2002 CD Real Rate of Return: (1.56%)
- 2003 CD Real Rate of Return: (1.01%)
- 2004 CD Real Rate of Return: (1.25%)
- 2005 CD Real Rate of Return: (0.32%)
- 2006 CD Real Rate of Return: 0.81%
- 2007 CD Real Rate of Return: (1.39%)
- 2008 CD Real Rate of Return: (1.21%)
- 2009 CD Real Rate of Return: (2.10%)
- 2010 CD Real Rate of Return: (0.99%)
- 2011 CD Real Rate of Return: (2.18%)
- 2012 CD Real Rate of Return: (1.32%)
- 2013 CD Real Rate of Return: (1.32%)
As you can see, CD’s have actually produced a negative real return (after tax & inflation) in 11 of the last 15 years. Does that look like a safe place to put your money?
To highlight another factoid found from Invesco’s research, if you were to invest $10,000 in 12 month CD’s for 15 years (ending December 2013), your investment would have grown to $15,570. But, after taking taxes and inflation into account, the purchasing power would be equal to $9,149. A guaranteed loss…
My advice: Don’t let your fear of losing money get in the way of building wealth. If you’re wondering WHERE TO INVEST, check out Warren Buffetts simple investment advice.
photo credit: Tax Credits