Is market-driven yield better?

Four paper airplanes representing market-driven yields.

Investing generally generates higher returns than savings accounts.

Both Market Savings and traditional savings accounts hold cash in FDIC-insured3 deposit accounts.  As such, their deposit safety is the same. The difference lies in their yield.  So, which is better? Market-driven yield or traditional savings account interest?

It is widely accepted that over the long term, investing in stocks and bonds outperforms savings accounts.  If we use the classic 60% stock and 40% bond portfolio to represent investing and the average one-year CD rate to represent savings, from 1983 to 2022, we see that the investment portfolio’s compound return is more than three times that of savings.

Understanding Market Savings’ yield 

When you sign up for a Save account, you select an investment portfolio. Most of the portfolios offer diversified exposure to different asset classes (stocks, bonds, etc.), while the S&P 500 Risk-Controlled portfolio offers exposure to the largest US stocks.

The following shows the return of the S&P 500 Risk-Controlled portfolio using Market Savings’ current investment funding amount over all hypothetical one-year terms from 2010 to August 2023:

The first thing that stands out is that, over any given year, the results may vary. They may be above average, below average, or even zero. The return modeling shows the following:

  • The Market Savings’ one-year term 8.27% variable APY* represents the average annual yield across all outcomes from 2010 to 2023.
  • The median outcome was 7.36%. This means that:
    ▸ ~ 50% of the time the outcome was greater than 7.36%.
    ▸ ~ 50% of the time the outcome was lower than 7.36%.
  • Approximately 25% of the time the outcome is zero.

All numbers provided in this section are as of August 2023.

What is the tradeoff? 

The Market Savings hypothetical backtest shows that average Market Savings yield can be as much as two to three times greater than leading savings account rates and significantly greater than your typical savings account rate. Additionally, it shows, under certain market conditions, the potential exists for outsized gains. However, at the same time, it shows the outcome can be less than a traditional savings account under certain market conditions. Even more important, in roughly one out of five outcomes, the customer would have received a 0% return.

Therefore, the tradeoff is between Market Savings’ potentially higher yields that vary based on market performance versus a traditional savings account’s lower yet more predicable yields. Stated differently, a Market Savings customer risks underperforming a traditional savings account in return for the potential for a higher average return that comes with the possibility for outsized gains.

Is market-driven yield better than traditional savings account interest? 

Clearly, market-driven yield has the potential to outperform traditional savings interest on average, and when we factor in its tax advantage (Market Savings is taxed as long-term capital gains2 while traditional savings account interest is taxed as ordinary income) and its inflation-beating potential, the argument becomes even stronger.

Still, ultimately, this is a long-run versus a short-run argument. Over the short run, the probability of underperformance versus traditional interest is a real risk. However, over the long run, given the data showing the relative advantage of investment portfolio performance versus savings accounts, the argument for market-driven yield versus traditional interest becomes compelling.


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