Here’s Why I’m No Longer Moving My Cash Into a CD

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Today’s CDs are offering attractive interest rates. Read on to learn why a CD might not be the best place, however, for long-term growth. 

A certificate of deposit (CD) lets you park a lump sum in a savings account for a fairly competitive interest rate. You’ll earn income steadily, but there’s a catch. You’ll lock your money up the length of your CD term (between three months and five years), and you risk forfeiting interest if you try to withdraw funds.

CD rates have lately been drawing many new depositors, as the APYs are averaging 4.25% to 5%. And though today’s CD rates are the highest we’ve seen post-2007 recession, there’s one big reason I’m still not locking my cash in a certificate of deposit.

The stock market has greater potential

A CD is a low risk deposit that can guarantee a fixed interest rate for a certain amount of time. When you sign the CD agreement, you know more or less how much your money will grow — so long as you don’t violate the contract — and the FDIC insurance ensures you’ll get back at least your principal.

And while that can bring security to those who abhor risk, for investors who are willing to take on more risk, it can mean missing out on even greater returns on investments with greater potential, like stocks and ETFs.

If you have a long time horizon (like five to 30 years), the stock market might give you returns that no CD could even dream of offering. There’s risk — you can lose your investment — but the long-term returns typically average much higher than those on fixed-income securities.

Stocks… in this market?

I can already hear the objections — stocks? Right now? Isn’t the stock market getting clobbered?

Yes, it is absolutely getting clobbered. Which makes today an excellent entrypoint. Many companies with long-term growth potential have been valued lower than their fundamentals would otherwise lead one to believe. And the S&P 500 (an index of the top 500 companies in the U.S.) is roughly 86% lower today than its all-time high of $4,793 on Dec. 21, 2021.

Past performance does not guarantee future returns, but perhaps a comparison could shed light on the opportunity in front of us.

After the financial crisis of 2007, the S&P 500 took a plunge and finally bottomed out at about $676 on March 9, 2009. If you had invested $10,000 in the S&P 500 on that day, you would have bought roughly 14.79 shares. That same holding would be worth around $61,230 at today’s price and $70,888 at its all-time high of $4,793 — a return of 612% and 708%, respectively.

Now, it’s unlikely you’ll time the market right and buy shares of the S&P 500 at this bear market’s all-time low. But even if you had waited a year later until March 9, 2010, your $10,000 would still have grown 362% to $36,201. That’s over a 13-year period, which is about seven more years than the longest term on a CD (five years), but significantly higher than today’s top CD rates.

Should you get a CD?

If fixed income is your jam, then, yes, you should consider getting a CD at today’s rates. Some signs, in fact, indicate that long-term CD rates could be trending downward, which might make now the last time to lock in high rates before they start declining.

But if you’re looking for greater potential, now could also be a good time to invest in the S&P 500. And hey — if you want the best of both worlds, no one’s stopping you from splitting your cash and depositing half in a CD and half in a brokerage account. You could benefit off fixed income, plus the potential for greater returns in stocks.

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