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I've heard about how CD's used to be above 10%. My question is why would there be any money in the stock market at these rates considering CD's are almost no risk? Even at 5% now they're looking tempting over stocks.
Quote:
Originally Posted by MelaniePayne
Investing in CD's back when they were offering high returns seemed like a safe bet at the time. It's all about balancing risk and return, and back then, stocks might've seemed riskier.
An excellent question Berteau. Also, good point Melainie and welcome to City-Data!
I cannot speak for others but if I could get a 5 year CD today paying 10% for my IRAs, I would definitely consider it for a portion of my money at least. And then after the 5 years over, if the rate was alot lower, then I would move back into funds and ETFs.
But several other people mentioned the potential of the stock market to do even better. So even if there is risk involved, the possibility of higher returns means I might want to have some of my money in say growth stocks. In other words, diversify. Safe money in those 10% CDs and some money in the growth stocks and funds.
ANYWAY, I do have a partial answer to your question - convenience. Back in the early 90s when I was going to college, I was also a part time bank teller. And if I remember right FDIC only covered $100,000 max per bank back then. So someone who was wealthy and wanted to buy those 10% CDs but still wanted FDIC coverage might need to open accounts at literally dozens of banks (I am keeping it simple as there are someways to increase coverage). This could easily be a nightmare so it might be easier to just stay in the market.
IIRC when those CD's were paying 10-12% there were plenty of people who bought CD's. But most of the CD's were for 1-2 years and when they were renewed Interest rates were on a decline.
Those high numbers were only for a few years and very few people had locked in long term money. People were nervous about Inflation and Interest rates then similar to today and did not make long term commitments. Like today those 5 year CD's probably paid less than 1-2 year.
I remember when my parents owned CDs that were paying 12%...only because they talked about it at the time and then later looked back fondly on those rates.
I remember a product called the one-year "All Savers Certificate" that was created by Congress in 1982. These paid tax-free interest up to $1,000 for an individual or $2,000 for joint filers. The account paid 70% of the 1-yeat T-bill rate. So in May 1982 the All Savers rate was 10.37% "tax free" -- check with your tax attorney or CPA. The idea was to try to get people to keep money in banks.
I worked at an S&L at the time, and these accounts were not very popular with people who had enough money to deposit, and even then the size of the deposit was limited. You were expected to accept a discounted interest rate in order to avoid taxes, but most people bet on the higher rates available in 6-month CD's.
The highest rate I remember was 15.565% on 6-month CD's in about 1980.
Why would you keep money in a bank at 10.00% when you have to pay 33% tax on it, and inflation is eating away the rest? I understand why people move money to the stock market where you have a chance of beating inflation and of holding off the tax man until you (hopefully) have long term gains that would be taxes at a lower rate.
I haven't (yet) read this whole thread but the reason I didn't buy CD's when they paid 10 to 15% or invest in stock market was because I was just starting in business with a partner and we put every dollar we had into that. I did know someone that bought Treasury-something for her children, she had more money than we did (we had very little).
Those times were tough financially for many we knew. No one could tell if those high rates were the top or if they were going even higher so some with $$$ waited....
We made the right decision to invest in our business and ourselves. Although many small businesses fail ours gave us a job and a great place to work for 24 years. Later on when we had enough money I opened an online brokerage account. Some of those years convinced me I was a genius at buying stocks, turns out I was a situational genius, tech stocks were hot then some cooled way off. Still investing and learning in retirement.
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