This past decade has been a disaster for stocks. Even before the financial crisis, the market had been relatively flat for ten years, and the events of the past 9 months have sent it down about 25% since then.
But the real effect on people who have had money in the market over the past decade is a lot worse when you consider that they could have been earning interest on their money in a savings account or in a certificate of deposit instead.
How much worse? We decided to do a quick comparison.
BankFox calculated an estimate for how much money an individual would have if they had invested $10,000 in a typical high-yield savings account for the past 10 years versus if they had purchased an index or mutual fund that tracked the S&P 500. We looked at historical stock prices and savings rates, and then calculated net returns after estimated taxes, compounded interest, and reinvested dividends.
Here are the results:
For every $10,000 invested in the stock market back in July 1999, investors would currently have about $7,700. But for every $10,000 invested in a high-yield savings account in July 1999, savers would currently have about $12,400 - approximately 60% more money!
Despite this calculation, most financial advisors would still advise that any money you’re investing for 30-years or more should still be put in stocks. After all, even with the bad economic downturn, the S&P 500 has gone up almost 8% a year on average over the last 30 years, way outpacing what you would get in a savings account during that time.
However, the lesson from this exercise is that for shorter time frames – even as long as 10 years - savings accounts and certificates of deposit can yield much higher returns than stocks, and are the safer investment if you know you’ll need the money soon. Although stocks typically increase your money faster in the long term, they can go down in the short term and can’t guarantee that your money will be there when you need it like a savings account can.
Just to be clear, did you include an accounting of dividends (reinvested or not) in the S&P 500 calculation?
Posted by chris_clyde -- Jul 9, 2009 1:58 PM
Yes – we did include reinvesting dividends in our calculation. Not including dividends, the S&P 500 index is actually down about 33% during the past 10 years. (It was at 1380.96 on July 1, 1999, and was at 923.33 on July 1, 2009.) So a $10,000 investment would now be worth about $6,700 if dividends were not counted or reinvested.
Posted by BankFoxStaff -- Jul 9, 2009 3:12 PM
Did you use a set interest rate for your High Yield Savings Account or did you factor what the HYS rates were each year?
Posted by topper413 -- Jul 10, 2009 10:47 AM
We varied the savings interest rate every month in the calculation based on an average of historical rates of high-yield savings accounts like ING Direct and how they compared to the prime lending rate at the time. We tried a few different methodologies but all versions ended up around $12,500.
Posted by BankFoxStaff -- Jul 10, 2009 6:57 PM
Rates and accounts may differ by geography so enter your zip code for better information.