Bank CDs Versus the Stock Market

Recently, a church board asked me:

We have our investments in bank CDs. We know they are down now, but we remember when they paid 7%, 10%, or more; also, they are insured. When the stock market bottomed, a lot of people lost a lot of money. So, why should we invest the church’s funds in the stock market? 

This is not an uncommon question, especially after the Recession when people saw their investments decline in value by 15% to 30%. This loss worried me on a number of scores. So, I thought seriously about how to answer their question and gathered some information to help.

A church or institution like a college or university has a very different investment time horizon than all of us. It is not looking at five, ten, or even twenty-five years down the road; rather, it is looking ahead in perpetuity. And, this is a very long time.

I asked the board how many of them have personal investments or retirement plans that hold stock and bonds. Most raised their hands. Then I asked, “How long do you intend to live?”  

When you look at the stock market over the past 100 years, it has had an average rate of return of 9.4%. This takes into account the Great Depression, two world wars and the most recent recession. Therefore, as a very long term investor, a church is in the unique position to weather whatever storms might come along, because at the end of the day, the sunny days outnumber the dark days by a huge margin.

The next point I addressed was the matter of FDIC insurance. There is no question this is an important benefit and protection if the account is less than $250,000. If there are multiple accounts at the same bank, the cap remains $250,000. While investing in stocks and bonds has its risk, no investor should make a singular bet on one holding. Smart diversification has proven to mitigate any risks of holding equities and bonds in an investment portfolio.

The third point has to do with inflation, as it is one of the biggest risks of investing in CDs. If a church has a 5-year CD that is paying 2.25% and inflation is averaging 3% to 3.25%, the church has locked itself into a money-losing arrangement. $100 invested today in a 5-year CD will earn just over 11.25%; inflation will total 15%. So when the CD matures, it will be “buy” almost 5% less than it did when it was originally created.

I presented the following statistics, including some from the Moravian Common Fund:

  • Over the past 20 years, the average CD rate was 3.4% versus a diversified portfolio that earned 9%.
  • On a ten-year basis the CDs earned 2.1% versus 6.9% for the Common Fund.
  • Put another way, if $100,000 was invested 20 years ago, the CD would be worth $168,000, while the invested funds would be worth $280,000; and,
  • 10 years ago the CD would be worth $121,000, while the invested funds would be worth $169,000. 

The recent five-year number for CDs is probably more indicative of what the future holds for interest rates in the near term. The average payout rate has averaged 0.4% over the past five years, while the Common Fund earned over 10% per year.  

CDs have a place if a church needs to have ready cash within a three-year period or so. But, it is not a “conservative” investment for long-term investors like the church. In fact, it is a risky bet because a church is hoping that inflation falls during the period when the CD rate is locked in. Otherwise, it will lose money.

Investing does have risks. The road can be rocky, but long-term investments will always perform better than bank CDs.