The Bottom Line on CDs

The Oppenheimer Funds put up a graphic that illustrates the “real” return in CDs (Certificates of Deposit) over the last decade.  The chart shows that the yield on 6 month CDs for people in the highest tax brackets after taxes and inflation is less than zero for all but one year.

For example, in 2012

  • a CD paying 0.2%
  • minus 35% tax,
  • minus 1.8% inflation
  • provides a -1.8% “real return” to the saver.

Over the long term, “safe” investments have generated only a very modest returns except for short periods associated with unusual economic conditions such as the “Great Depression” of the 1930s or the high inflationary period at the end of the 1970s.

This is not to say that CDs and money market funds do not have a place in an investor portfolio.  They are a source of readily available cash, and for people willing to accept a modestly negative “real” rate of return, they provide an asset class that is not going to fluctuate with the stock or bond market.

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