The High Price of Safety: Moving from Stocks to Fixed-Rate Products Amid Market Volatility 

For many investors, the financial landscape over the past year has been marked by a confluence of factors that have made navigating the markets particularly challenging. The backdrop of higher interest rates, market volatility, and concerns regarding the overvaluation of equities has led to a pervasive sense of uncertainty and, in some cases, fear over what may lie ahead.  

Naturally, many investors have begun looking for so-called safe havens to park their hard-earned savings until a sense of normalcy returns to financial markets. Meanwhile, banks and insurance companies have positioned themselves accordingly, promoting high-yielding products like Certificates of Deposit (CDs) and fixed annuities to attract cautious investors.  

These products no doubt offer the allure of stability and predictability in returns—a tempting proposition in uncertain times. However, while the shift toward high-yield fixed-income vehicles may seem prudent in the face of market volatility, it’s crucial to consider the potential risks and long-term implications of such a move.  

The Allure of High-Yield Fixed-Income Products 

With short-term yields at their highest levels in decades, fixed-income products like CDs and annuities are more attractive than they have been in recent history. Although the Federal Reserve has held rates steady since July 2023, the yield on the one-year Treasury bill remains above 5%—a peak it hasn’t reached since just before the 2008 global financial crisis.  

To capitalize on this opportunity and lock in attractive rates, investors have been pouring money into fixed-rate bank products and annuities. In fact, annuity sales exceeded $300 billion in 2022 and 2023—amounting to record highs—largely driven by explosive growth in the fixed annuity market, according to data from LIMRA. 

Shifting from equities to “safer” products like CDs and annuities may seem like a smart move amid economic and market uncertainty. However, it’s important to consider the potential costs of such a move, as abandoning equities can have longer-term implications for your financial goals and well-being.  

The Opportunity Cost of Fleeing Equities  

First, there’s an opportunity cost associated with not owning equities—even when stock prices are declining. In most cases, attempting to time the market may result in lower returns than simply staying the course. That’s because even when investors get out of the market at the “right” time, they rarely get back in before the ensuing recovery.   

Indeed, there’s been an abundance of research illustrating the cost of market timing. For example, a recent study from Bank of America quantified the hypothetical cost of missing the S&P 500’s 10 best days each decade, going back to 1930.  

The study found that investors who remained invested throughout the period would have earned a cumulative return of 17,715% between 1930 and 2020. Meanwhile, investors who missed the 10 best-performing days each decade due to market timing would have earned a return of just 28%.  

Losses are frustrating for any investor, even when they’re only on paper. But these results, although hypothetical, indicate that the opportunity cost of fleeing equities can be far more painful over the long run.  

Beware of Lock-Up Periods 

Of course, there are times when fixed-income products perform better than equities, especially when interest rates are above average. However, even if you could perfectly time these shifts in relative performance, you may not have the flexibility to move your funds in a timely manner.  

While investing in equities requires investors to endure periods of discomfort, securing an attractive interest rate through a CD or fixed annuity also comes at a cost. That is, when you commit funds to these types of products, you typically can’t access them for a set amount of time.  

With CDs, for example, the lock-up period may range from three months to five years. The surrender period for fixed annuities can be even longer, meaning you might not be able to withdraw your funds for several years without incurring a penalty.  

This lack of flexibility has implications beyond the ability to take advantage of changing market dynamics. It may also prevent you from accessing your money when you need it most—for instance, if you need to cover an unexpected medical expense or lose your income temporarily.  

Don’t Forget About Inflation 

Indeed, high short-term interest rates can seem attractive given the promise of immediate, appealing returns compared to the often slower, more variable growth seen in investments such as equities. However, this perspective tends to overlook a critical factor: inflation risk. 

When an investment’s return rate is lower than the rate of inflation, you effectively lose money in terms of real value—even if the nominal value of your investment grows. This risk is particularly acute with cash and fixed-income investments, which may offer higher interest rates in the short term but often fail to keep pace with inflation over longer periods. 

On the other hand, equities stand out as one of the few asset classes that have historically outpaced inflation over the long term—a key reason why including equities in a portfolio is ideal  for anyone with long-term financial goals, such as saving for retirement. In other words, fleeing equities for CDs or annuities may mean your savings are worth less when you eventually retire or withdraw your funds for other financial obligations in the future.  

The Value of a Sound Investment Plan 

During periods of market uncertainty and turmoil, the instinct to gravitate toward safety and stability is a natural response. Fixed-rate products, such as CDs and annuities, can offer a haven, providing predictable returns in an otherwise volatile environment. However, these products, while comforting in the short term, may not align with your longer-term financial goals.  

Remember, market conditions are inherently cyclical and often short-lived compared to the span of a typical investment horizon. Reacting to temporary market fluctuations by shifting toward overly conservative investments can derail your progress toward longer-term goals, underscoring the importance of a sound investment plan.  

A well-constructed plan serves as a roadmap, guiding your investment decisions based on your unique circumstances and goals rather than the ebb and flow of the market. By sticking to your plan in good times and bad, you can navigate periods of uncertainty with confidence, ensuring your investment strategy remains aligned with your long-term objectives. 

CornerCap is here to help. Contact us to develop a comprehensive wealth plan that appreciates with your life story.