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CDs could beat stock picking

By Sheyna Steiner · Bankrate.com
Wednesday, July 11, 2012
Posted: 2 pm ET

The story of the tortoise and the hare is an apt analogy for today's saving and investing climate. While higher yields than are currently available in CDs could get savers to their goals more quickly, the certainty of receiving the stated yield and getting principal back at the end could be more appealing to some savers than the sky-high returns promised by some other investments.

For instance, in the stock market lately dazzling returns are harder to come by. A recent report by Goldman Sachs showed that the fates of individual stocks are more closely linked to the overall market than they have been in a year.

The website CNNMoney reported on the study in the story "Goldman Sachs: Stock picking isn't paying off."

So-called idiosyncratic risk -- how much an individual stock deviates from the performance of the overall stock market -- is at its lowest level since July 2011. And that makes it tough to find stocks that stand out from the crowd.

Being in the market at all can seem a bit defeating for some investors. Over the past year, the S&P 500 has returned 1.66 percent with quite a bit of volatility in the interim. A five-year CD purchased July 13 would have had an average yield of 1.62, percent according to Bankrate's records.

It's for that very reason that experts recommend staying out of stocks unless you have a long time horizon. In the long run, short-term volatility recedes to a blip while in the moment it can feel like a terrifying free fall.

Of course, it's never an either/or scenario. There is room -- and even a need -- for all types of investments within a portfolio.

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5 Comments
Dmitry
July 26, 2012 at 3:26 pm

1. Current CD rates are lower than inflation - so all you get is a predictable rate of loss of buying power.

2. Don't like (scared of) stocks? Purchase bonds. Better than CDs with predictable returns. (of course, don't go heavily into junk bonds). Plenty of utility bonds with 4-5%+ yield.

I did buy CDs, but that was when interest rates were 4-5% for 1yr CD.

Sheyna Steiner
July 18, 2012 at 10:19 am

So, all active traders get positive returns over every time period? No. Also, that buy and hold is dead is highly arguable, though it would be more correctly called buy, hold and rebalance.

Vintner Don
July 18, 2012 at 8:27 am

The 'buy and hold' stock ownership is dead. Anyone who knows anything about holding stocks long term knows this is not a good idea. An active trader will out perform any CD on the market. But, since this was bank sponsored, I would not expect a true comparison.

Jay
July 17, 2012 at 11:25 pm

Northwestern Mutual Permanant life policy would have returned 5.85%

James
July 16, 2012 at 6:31 am

Nothing but lies, that is all I have ever heard from the people I have trusted to invest my money. I learned how to invest myself and have made over a 100% return already this year. Yeah 1% on a CD will get you to the same place in about 50 years! Learn to invest yourself.