Negative Returns On CDs! Junk Bonds paying under 10%! What’s an investor to do?


(September 2012) I knew all the individual numbers but, I did not put it together until I read Philip Brewer’s article “Savings Rates Below Inflation, Save Anyway

Do CDs really have negative returns?  After inflation and taxes, a 2 year CD has an expected return of  -1.38%,  and a 5 year CD has an expected return of  -1.10%.



2 – Year CD5 – Year CD
High Yield CD 1.25%1.69%
Yield After Taxes (assumed rate of 35%)0.82%1.10%
After Tax Yield After Subtracting Inflation (assumed to be 2.2%)-1.38%-1.10%
To see a list of high yielding CDs go here.  

With returns like this, why save?

I think there are three basic reasons why to still save and more importantly invest time into saving.

1) Keeping your money in cash, using a checking account or even savings accounts will provide you an even worse rate of return (around negative 2.0%). Or put another way, you are giving up an additional 5% of your money by not putting it into a CD over 5 years.

2) By staying invested, you are positioning yourself to benefit when interest rates rise.  While interest rates are unlikely to rise substantially in the next 3 years, you want to be investing your money when they do rise.  One way that people do this is by creating a CD ladder in which money matures at regular intervals, enabling them to invest at higher rates while interest rates climb.

3) Saving is psychological.  How you think about money influences how much you save.  If you have a goal or pay attention to its growth, you’re likely to save more.


Saving Versus Investing

While these words are often used as substitutes for one another, I think its worth differentiating between them.  Saving is the act of putting aside money for a future use.  Investing is how you allocate those funds.  Self described “savers” are just really conservative investors that put their money into banking products, like savings accounts, money market accounts, and CDs.

Investing has never been harder.  Investors don’t seem to have a good choice.  On one hand, the real return on safer investments is negative.  On the other hand, the stock market is very volatile and appears to be extremely risky. With the US economy still in a slump and the 2008-2009 market crash still a recent memory, people have good reason to be cautious.


What should one do?

The answer is to invest for the long-run. That means owning a mix of both conservative and more risky investments.

In the piece, “Are There Any Safe Investments Left?” (which was the original inspiration for this post) Roshawn Watson makes several great points:

1) Investing has always involved risks and had cyclical ups and downs. While investing may feel more scary, that does not mean that now is a bad time to invest.

Before the most recent real-estate / stock market collapse of 2008, there was the dot-com crash of 2000-2001.  What Roshawn does not say is that the best investment returns are often achieved in the year or two following a crash.  In other words, pulling back when the market seems turbulent may lead to you missing out on the best returns. The problem is that most investors get into the market after the biggest gains in value have already occurred and leave after absorbing the biggest losses.  One way to avoid this scenario is to be invested at all times.

2) Recent investment returns have not been as bad a people think. Many people describe 2000 – 2010 as the lost decade, as the S&P had a return of -1.25%. However, Roshawn points out that many asset classes like bonds, and emerging market stocks did well.  A person with a diversified portfolio (60% stocks / 40% bonds) would have achieved a positive return.

To quote a Billy Joel song, “The Good Old Days weren’t always so good and tomorrow ain’t as bad as it seems.” You gotta invest.

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