Cash: Banking Or Investing?
Many investors are opt to traditional banking for their short term cash. Using a traditional bank not only gives a customer peace of mind as banks are considered to be ultra safe: even in 2008-2009 financial crisis, banks eventually withstood the disaster because of the federal government’s intervention (though some money market funds broke the buck, investors were still able to make their money back). In general, FDIC insurance further covers up to $250,000 to checking, saving, CDs deposits in a bank. Banks also offer much more convenience with their extensive physical branches.
However, online electronic money transfer and ease of investing in index funds or ETFs have provided another way for investors to derive better returns without incurring substantially more risk and sacrificing ease of use. Let’s first take a look at short term bond fund returns vs. CD returns
Short term bond funds vs. CDs
The following chart compares one year returns of investing in VBISX (Vanguard Short-Term Bond Index Inv) or purchasing 1-year CD from 1995 to 2016 (as the fund started in mid 1994). The historical 1-year CD yield is from bankrate.com.
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