Why Low-Risk CDs Might Be Your Riskiest Investment

Over the past few years, many people have shifted some of their savings into high-yield certificates of deposit (CDs). It was a good strategy for some Americans interested in low-risk investments that pay relatively high yields, especially with many CD rates above 4%.

CDs have a lot of benefits. The interest rates are guaranteed (unless you take your money out early); the accounts are FDIC-insured up to $250,000 per depositor, per FDIC-insured bank, per ownership category; and if you need access to your money, you can get it, though you'll likely pay a fee.

But there are times when putting your money into a CD could be riskier than you think. Over the past few years, the stock market's gains have trounced CD rates, which means that using CDs to build your retirement nest egg could be a risky move.

It could be very risky to rely too much on CDs

While the stock market can be volatile, its average historical rate of return is 10.2%. There's no guarantee your investments will earn that much, and you could certainly lose money, but over the long term, the market tends to go up.

Our Picks for the Best High-Yield Savings Accounts of 2024

Product	APY	Min. to Earn
American Express® High Yield Savings Member FDIC. APY 3.80% Rate info 3.80% annual percentage yield as of December 28, 2024. Terms apply. Min. to earn $0 Open Account for American Express® High Yield Savings On American Express's Secure Website. Member FDIC.	3.80% Rate info 3.80% annual percentage yield as of December 28, 2024. Terms apply.	$0	Open Account for American Express® High Yield Savings On American Express's Secure Website.
Capital One 360 Performance Savings Member FDIC. APY 3.80% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Dec. 6, 2024. Rates are subject to change at any time before or after account opening. Min. to earn $0 Open Account for Capital One 360 Performance Savings On Capital One's Secure Website. Member FDIC.	3.80% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Dec. 6, 2024. Rates are subject to change at any time before or after account opening.	$0	Open Account for Capital One 360 Performance Savings On Capital One's Secure Website.
Western Alliance Bank High-Yield Savings Premier Member FDIC. APY 4.46% Rate info The annual percentage yield (APY) is accurate as of November 7, 2024 and subject to change at the Bank’s discretion. Refer to product’s website for latest APY rate. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY. Min. to earn $500 to open, $0.01 for max APY Open Account for Western Alliance Bank High-Yield Savings Premier On Western Alliance Bank's Secure Website. Member FDIC.	4.46% Rate info The annual percentage yield (APY) is accurate as of November 7, 2024 and subject to change at the Bank’s discretion. Refer to product’s website for latest APY rate. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY.	$500 to open, $0.01 for max APY	Open Account for Western Alliance Bank High-Yield Savings Premier On Western Alliance Bank's Secure Website.

When you put your money into CD rather than the stock market, you create an opportunity cost for your money. In this case, the opportunity cost is the potential for your money to earn far more in the stock market.

Here's how that might look over five years:

If you continue to invest in the market, vs. putting your money into CDs, you'll see an even bigger difference as time goes on. Here's the same two investments over a 25-year timeline.

This scenario shows an investment in the stock market has the potential to be worth more than four times the amount of the CD over 25 years!

There are some caveats with these numbers, of course. For one, inflation will eat into your returns, whether you earn them in the stock market or a CD. Also, the stock market could earn you far less or far more than 10.2%. For example, the S&P 500 lost 18% in 2022 but gained about 26% in 2023.

Those extreme swings can turn people off from investing in the stock market. But that would be a huge mistake, especially when trying to grow your nest egg as much as possible. CDs are a great place to put your money for a little while, but over time, their returns will fall further and further behind the long-term gains of the stock market.

One of the best ways to invest in the stock market

You don't have to be stock-picking whiz to invest in the stock market. In fact, it's statistically better if you don't pick individual stocks; most passively managed funds beat actively managed funds over the long term.

It's generally best to put your money in a low-cost fund that tracks a stock market index, like the S&P 500.

Low-cost index funds typically charge minimal expense ratios (a management fee), meaning that you keep more of what your investments earn. For instance, I have a low-cost index fund in my brokerage account that charges an expense ratio of just 0.03%, which means it costs just $3 annually for every $10,000 invested.

And with these funds tracking the S&P 500, you don't have to worry about researching stocks or changing investment strategies. If the stock prices of the leading 500 publicly traded companies are doing well, your portfolio will benefit.

Don't get me wrong; there's nothing inherently risky about CDs. But they can be risky if you're using them to grow your retirement portfolio instead of investing in the stock market. Which is why choosing an index fund over a CD is better for building long-term wealth.