Investing in CDs versus Stock and Bond Market
All investments are subject to risk. Investing in the stock and bond market subjects an investor to market risk – the possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets.
Certificates of Deposit (CD) are safe from market risk. They are not safe, however, from inflation risk. When your investments don’t keep up with the rate of inflation, the purchasing power of your money declines. This is known as inflation risk or purchasing power risk.
The effects of inflation can be devastating to a retiree’s standard of living. For example, if your annual living expenses are $50,000 per year today and inflation averages four percent, you will need $109,556 in 20 years to maintain the same standard of living.
Ronald Regan said, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”
The real return of your investments is the net return you earn after subtracting taxes and inflation. If you are not earning a positive real return, you are going backwards in terms of your purchasing power.
For example, if you earn five percent on a CD and taxes and inflation are 33 percent and 3.5 percent, your real return is zero percent.
Net return is the gross return of CDs or the S&P 500 adjusted for inflation.
While stocks incur more risk, CDs offer a fixed rate of return, and the interest and principal on CDs will generally be insured by the FDIC up to $250,000.
CD performance is based on average historical interest rates from Bloomberg. Data prior to 2013 is from Lipper. The Consumer Price Index (CPI) measures inflation. The S&P 500 Index is unmanaged and a common measurement of market performance. It is not possible to invest directly in an index. Past performance is not a guarantee of future results. Investments in mutual funds will fluctuate with market conditions, and you may have more or less than the original amount invested when you sell your shares.
Chris Nolt is the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families selling a farm or ranch and transitioning into retirement.
For more information, call 406-582-1264 or visit solidrockwealth.com and solidrockproperty.com.