Savings Accounts as an Investment?

By Chad Henage - June 13, 2012 | Tickers: CVS, DFS, F, GOOG | 0 Comments

• Email
• Print

In a recent article by Jeremy Bowman of The Motley Fool, he pointed out that “Stocks Look Dirt Cheap”. He made some excellent points, that nearly two-thirds of the S&P 500 beat earning estimates, and that the current P/E ratio of the S&P 500 is the lowest since the late 1980s. What really caught my eye, was the results of a poll showing what Americans thought would be the best long-term investment. Look at the results:

• Gold 28%

• Real Estate 20%

• Stocks 19%

• Savings Accounts 19%

• Bonds 8%

This reminds me of the old sing-a-long, “one of these things is not like the other”.

Savings accounts? Seriously? First, I guess we need to define what a long-term investment is. Most financial advisors would suggest that long-term investing is at least 5 years. Jeremy in the above article took the tactic that stocks should be the best investment. I'm less concerned with proving that stocks are the best investment versus explaining why savings accounts are not.

Before we get to savings accounts, let's briefly look at the other asset classes. I can make a case fairly easily for stocks, as a long-term investment they still outperform other asset classes. Never mind that the overall averages say stocks are cheap, there are individual cases that scream unbelievable opportunity. Companies in multiple industries look like excellent values right now.

CVS is benefiting from Walgreen's mis-steps with the Express Scripts relationship and has been raising its dividend by 28% a year recently. Ford should benefit from a turnaround in the auto industry and pays a yield that beats most Treasury notes. Google is sitting on about $50 bil. in cash and investments, sells for less than its growth rate, and sells for a P/E that is at the low end of its historical range. Clearly there are opportunities in stocks.

While stocks would be my personal first choice, I can also see the attraction to real estate. Whether it be to buy and hold as investment property, or to buy for capital gains, we are talking longer-term not flipping houses. Long-term there is almost no question real estate is attractive. Everyone knows that home prices are about as affordable as they have been in a long time, and the negativity around housing gives you a sense that this is about as bad as it gets. What are people going to do, stop living in houses? That brings us to bonds as a long-term investment.

Where bonds are concerned, I have a harder time justifying this asset. Long-term bond rates are extremely low. As Jeremy pointed out in his article, the 10-year Treasury note was yielding 1.55% a 60 year low. Remember that buy low and sell high idea? Well, it applies to bonds as well. Buying a Treasury note today, only makes sense if investors are going to accept lower and lower yields. With yields at record lows, I would not be willing to make this bet. So if bonds aren't attractive, what about gold?

To invest in gold, investors are focusing too much on the last 5-10 years of results and expecting that these will continue. However, looking at the comparison of gold returns versus the S&P 500 in the last 20 years, shows this outperformance is only in the last 10 years:

(All numbers are cumulative returns, source for gold prices here, source for historical S&P 500 here) 

Depending on when you bought stocks or gold, your results could be very different. Over the last 20 years, gold and stocks are just about neck and neck. The fact that gold has outperformed over the last 10 years would make me nervous about its outperformance in the next ten years. So what about the 19% of the previously mentioned poll that said they wanted to use savings accounts?

To understand the fallacy of savings accounts as a long-term investment, you have to realize that one of the biggest risks to any investment is inflation. The issue isn't as much savings accounts, as the fact that there are numerous better opportunities. Never mind that as the above table shows, either stocks or gold would have crushed a savings account investment. In particular at the end of 2011, the best rate on a savings account was through either Sallie Mae or Discover (NYSE: DFS). These two institutions offered an APY of about 1%. At the same time, you could have bought a Series I Savings bond from the Federal Government with a current yield of 3.06%. Now granted there are some caveats. With a Series I savings bond the rate is adjusted every six months, but a regular savings account can be adjusted at any time. In addition, with a Series I bond you'll pay a 3 month interest penalty if you redeem the bond before five years. You also are required to hold the bonds for at least 12 months. That being said, I've personally tracked Series I Savings Bonds for the last five years. There has only been one six month period that these bonds would have paid less than savings accounts. Last but not least, with the inflation rate at 3% for 2011, a 1% savings account, means a 2% annual loss in buying power. While the previously mentioned Series I bond won't make you a lot, you would have at least kept up with inflation.

In conclusion, I'm very worried for the 19% of the respondents in the aforementioned survey that said they thought savings accounts would be the best long-term investment. The perceived safety of savings accounts might reassure savers, but this safety comes at a cost of buying power over time. This is a risk that apparently these investors aren't considering. While other investments have different risks, at least there is a chance of keeping up with inflation. Savings accounts have virtually no chance of keeping up with inflation over time.

• Email
• Print
• Feedback