This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
CDs are a safe bet for your money, but they can’t compete with investing in the stock market. Read on to learn why. [[{“value”:”
Image source: Getty Images
Certificates of deposit (CDs) have become a popular investment over the past few years as rising interest rates have helped push CD rates higher. And they’re still a good option for some people.
A few 5-year CDs have annual percentage yields (APYs) over 4.00%, giving people a safe place to earn a decent return on their investment.
Despite these relatively high rates, I don’t have any money in CDs. And if you want to maximize your returns, you shouldn’t either. You could earn much more by investing your money in the S&P 500. Here’s why.
The odds are in the S&P 500’s favor
The stock market can be volatile, which makes many people nervous. Their hesitation is understandable, but there’s also a risk of not investing your money in the market. That’s right, it’s risky not to put your money into the market because it’s possible it won’t grow fast enough.
Consider this: The S&P 500’s historical annual rate of return is 10.2%. If your aim is to save as much money as possible for retirement, the stock market is the place to do it.
Let’s assume you put $5,000 into a 5-year CD earning 4.00% APY. Meanwhile, your friend puts the same amount into an index fund tracking the S&P 500, earning 10.2% annually. At the end of the five years, you would have about $6,083 — but your friend would have about $8,126.
Of course, there’s no guarantee you’ll earn that much each year. But you could, and you could even earn much more. Just for perspective, the S&P 500 has soared 79% over the past five years! And it’s this huge potential of the S&P 500 that makes it a far better long-term investment than a CD.
How to ease into investing in the stock market
The easiest way to start investing is to open a brokerage account and buy a low-cost index fund. Plenty of great investing apps make it easy to open an account.
Thinking about the stock market can be overwhelming if you’re new to investing. So, let’s simplify a bit: The S&P 500 is just an index that tracks the performance of 500 of the largest companies listed on U.S. stock exchanges.
You can buy shares in funds that track the index, just like you can buy shares of individual stocks. For example, I own shares of the Vanguard S&P 500 ETF, one of the largest index funds in the world, which tracks the benchmark S&P 500 index.
And if you never develop an interest in investing in individual stocks (like Apple, GM, Amazon, etc.), you can just stick to the index fund. Your investments will benefit when the market as a whole is doing well.
Before investing your money into the stock market or a CD, ask yourself what your goals are. If you’re nearing retirement and need a small portion of your money to simply outpace inflation, then buying a CD may be the right move.
But if you want to maximize your returns and give your retirement funds the best possible chance to grow over time, put your money into the market.
Alert: highest cash back card we’ve seen now has 0% intro APR until nearly 2026
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!
Click here to read our full review for free and apply in just 2 minutes.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Chris Neiger has positions in Apple. The Motley Fool has positions in and recommends Amazon and Apple. The Motley Fool has a disclosure policy.
“}]] Read More
