To Save or To Invest? Exploring the High-Yield Savings Account in 2023

Have you noticed the recent rise in popularity of high-yield savings accounts (HYSAs) and bank certificates of deposit (CDs)? Perhaps I’m more attuned to trends in financial vehicles as a financial advisor, but I have noticed a definite surge in this topic.

Just last week, a friend in her 30s asked for my opinion about moving her investments to a HYSA that currently has a 5.2% return rate.

Then two days later, a client nearing retirement questioned why he should have to endure the stressful volatility of his heavily equity-weighted portfolio when he could get a guaranteed 5% return this year from a CD, not to mention the added security of FDIC insurance.

According to my increase in conversations about HYSAs and CDs last week, this topic seems to span genders, generations, and proximity to retirement!*

*As a former PhD biochemist, I feel the moral obligation to point out that a sample size of n=2 collected from anecdotal conversations is by no means significant, and I was merely attempting a bit of humor here ??

The Troubling Trend in HYSAs: From Short-Term Reserves to an All-In Approach

In the past, HYSAs primarily came up in conversation in the context of short-term reserves, emergency funds, and intermediate-term (e.g. 3-5 years in the future) savings goals. And that makes perfect sense.

HYSAs are excellent savings vehicles that allow you to earn a modest return on your short-term savings buckets for expenses that you can’t afford to expose to market volatility or the risk of decline. I’m all for this type of account when it is integrated into a broader financial plan where each account and investment has a clearly defined purpose.

But now I’m noticing a concerning number of people who want to abandon their investment strategy and move their entire portfolio into a HYSA to get that 5% return this year. This trend is troubling to me as a financial advisor, so let’s discuss why.?

Why now? Fear, Pessimism, and Market Uncertainty Drive the Desire for a Safe Alternative

So, why has this trend emerged in 2023?

Well, I suspect it is related to the convergence of current political, economic, and financial crises that have conjured intense emotions of fear, panic, and general pessimism among investors. During times of market uncertainty, investors tend to prefer the safety of a guaranteed return rate over the stress of volatility.

Here are just a few reasons that the average investor may be panicking – “The Perfect Storm,” you could say.

• The large-cap US equities market, as measured by the S&P 500 index, had a 2022 return of approximately -20% (1), and the index has yet to recover from its peak in early January 2022
• Concerns over the US debt ceiling and the potential for default on international debt payments
• Ongoing political tensions between the two major parties in the US government
• Weakening of the US Dollar and fears about its status as the world’s reserve currency
• Elevated levels of inflation since mid-2022 without matching salary increases
• Rising interest rates to combat inflation, which make it more difficult to justify borrowing
• Housing market inaccessibility
• Recent bank failures evoking memories of the 2007-2008 crisis
• A pervasive sense of an impending recession on the horizon

I could go on, but I don’t want to give too much blog post real estate to these crises over which we have very little control. I prefer to focus on what we can control.

Any one of the above reasons is enough to raise your heart rate if you think too hard about it, but several of these concerns overlapping in one’s mind can – and I can assure you, do – cause intense anxiety and the desire to stay as far away from the stock market as possible.

Hence, the rise in popularity of so-called “safe” financial vehicles like the HYSA and CD.?

The Relationship between Inflation, the Federal Reserve, and HYSA Returns

I’m always a proponent of understanding any product that you buy, so let’s take a look at a few of the factors that influence HYSAs.

Why do HYSAs, CDs, and other short-term fixed income products have higher returns to begin with right now? This can all be traced back to the elevated levels of inflation that we’ve been experiencing since around March 2021. Allow me to explain.

Accelerated inflation tends to happen when the money supply rises faster than usual. When the money supply goes up, the value of money tends to decrease. To drastically oversimplify a very complicated topic, it takes more dollars to buy the same number of products when there are more dollars in circulation.

A few causes of the elevated money supply stemming from recent events in the US include the injection of $4.2 trillion into the economy from COVID-19 stimulus packages (2), near-zero interest rates that fostered high levels of borrowing and aimed to stimulate the economy during the pandemic (3), and increased government spending on various healthcare and human services programs (4). Each of these events increased the money supply in the US and may have played a role in the subsequent increases in inflation rates that began in 2021.

Enter the Federal Open Market Committee (FOMC) of the Federal Reserve. The FOMC often deals with periods of elevated inflation by taking measures to reduce the money supply in the country. The FOMC has the power to increase the Federal Funds Rate, making it more expensive for banks to borrow money. When it’s more expensive to borrow money, fewer companies and people decide to apply for loans, and the amount of loaned money in circulation tends to decrease. This is exactly what the FOMC has done several times over the past year, and an increasing interest rate is one reason that inflation has been steadily making its way down from its peak of 9% in June of 2022.

How does all of that relate to a HYSA? That increased Federal Funds Rate gets passed down to anyone who acts as a lender – not just the banks. When you, in essence, loan your money to the bank in the form of a HYSA, or you loan your money to the government or corporations in the form of short-term bonds, you will get to enjoy that increased interest rate, too. Sounds great, right?

But not so fast! As of the end of April, inflation (Core CPI) was reported by the US Bureau of Labor Statistics to be 5.5% (5). A HYSA may be earning an annual return of 5% per year, but it is going to struggle to even keep up with inflation in the current monetary environment. After taxes are subtracted from that HYSA income, net purchasing power may actually go down even if inflation continues to decrease throughout the year.?

An Important Thought Experiment

While it is true that losing a little bit of purchasing power this year is probably not going to make or break your ability to support your lifestyle, and it does feel good to know exactly how much money you’re going to have at the end of the year, there is one possibility that I strongly urge you to consider before selling your investment portfolio and taking cover under the safety of a HYSA:

What if – contrary to the fears of so many investors – the equity market took, for example, a 20% jump while your money was tied up in a loan to a bank, corporation, or the Treasury?

Before you say such a positive jump is out of the realm of possibility, keep in mind that over the past 100 years, the equities market has had positive returns on average in 4 out of every 5 years, and some of the highest annual return rates have occurred in the first year following a market decline. See the data below (6).

Historically speaking, a market decline such as the one we’ve endured since early 2022 is the exception, not the rule. And if history repeats itself again (as it has time and time again ever since the existence of the stock market), you won’t want to miss out on the upswing when this market decline turns around.

So, continue with our arbitrary example of a 20% return and then ask yourself these follow-up questions:

• What would be the opportunity cost of missing out on a 20% return on your portfolio? How long would it take for your savings earning a 5% return to catch up with a portfolio of equities that earned 20%?
• What will your strategy be if interest rates – and hence, HYSA rates – find their way back down to 2-3% in the next few years?
• And finally, do you have a long-term strategy for keeping pace with the rising cost of living, and does a 5% return rate fit into that plan??

There’s no way to predict what is going to happen in the stock market, and certainly not when it’s going to happen. Don’t mistake my hypothetical example of a 20% return for a market call. I have no clue what is going to happen this year. Just because the S&P 500 is currently up 12% YTD does not mean that it will continue to rise. Maybe it will, maybe it won’t.

The beautiful truth is that for the long-term investor with a well-diversified portfolio of equities, the short-term investment performance does not matter. Let that truth bomb sink in for you.

But no matter your position in life or proximity to retirement, I strongly encourage you to participate in this thought experiment, and make sure you have really good, crystal-clear answers for all three of those bulleted follow-up questions.

If you don’t, you may benefit from talking to a financial professional, and I’d be happy to talk through your concerns as they relate specifically to your unique situation. Click the link below if you’d like to schedule a 30-minute call with me.

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Choosing Equities Amidst the Allure of Stability

So, are HYSAs and CDs better than equities in 2023? Should we all be ditching our investment portfolios in exchange for a HYSA while we wait for this “Perfect Storm” of current events to blow over?

As a financial planning professional and long-term investor for my own financial goals, I have to respond with a resounding “heck no!”

Why? Because I have a really hard time believing that the great companies that make up the bulk of our economy – the companies whose names you know and whose products you use every day – are all going to fail and never become profitable again. Or that new companies will not rise up out of the embers of a crisis.

How can I be so sure that I’m not throwing my savings in the trash by staying invested in the equities market? Well, I can never be sure, I suppose, in the sense that no one can predict what’s going to happen in the future. All I can do is look back to over 100 years of history to guide my decisions.

And looking to history for answers, what is the one thing that every single market decline of the past had in common?

It’s not what caused the market declines. Each time, the circumstances were unique. It’s not how long they lasted, or how far the market fell before turning around. There’s no reliable pattern there.

The only thing every single market decline of the past has in common is that they have all eventually ended, leading the equities market to surge upwards to reach new highs.

And in order to participate in the growth that precedes those highs, we have to be there waiting throughout the lows. If we’re stuck in a HYSA or CD during the months when the market turns around, we’ll have missed a great opportunity.

I’d like to participate in that return to positive market returns that I believe will eventually come – and may even be happening as I’m writing this sentence – and so I patiently hold my equities investments and wait for payday in the future.

Conclusion

I urge you to bring this topic up with your financial professional next time you talk.

If you don't have an advisor and you'd like to talk to one, send me a message or click the link below to schedule a free personalized strategy session with me.

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As always, reminding you to think long-term, make decisions based on facts rather than emotions, and focus on the one aspect of investing that you can control 100% of the time — your behavior.

Sources

(1) S&P Global

(2) USAspending.gov

(3) Federal Reserve

(4) USAspending.gov

(5) US Bureau of Labor Statistics

(6) Yahoo Finance

Disclosures:

Securities offered through?Securities America, Inc. (SAI)?member FINRA/SIPC. Investment advisory services offered through Securities America Advisors, Inc. (SAA). SAI and SAA are separately owned and other entities and/or marketing names, products or services referenced here are independent of SAI and SAA.

This profile is for residents of the United States and is for informational purposes only. It does not constitute an offer to buy or sell any securities or products.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Past performance is no guarantee of future results.

Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

Indexes are unmanaged, and investors are not able to invest directly into any index.