S&P 500 Outperforms Bank Deposits Over a Decade Despite Volatility and Taxes

Investing 100,000 shekels in the S&P 500 index historically yields significantly higher returns over ten years compared to a bank deposit at 3% interest. With an average annual return of about 10.3% since 1957, including dividends, the S&P 500 can grow the initial sum to roughly 216,000 shekels at 8% annual return, versus about 134,000 shekels from a 3% deposit before taxes. This difference of approximately 63,000 shekels is driven by compound interest on the higher returns.

However, the S&P 500’s returns are volatile, with notable declines such as a 37% drop in 2008 and a 49% fall during the dot-com bubble burst. In contrast, bank deposits remained stable during these periods. One decade ending in 2009 even saw a negative annual return of 0.95%, reducing 100,000 shekels to about 91,000 shekels before tax. Despite this, about 93% of rolling ten-year periods since 1928 ended with positive returns, and this rate approaches 100% over fifteen years.

Currency fluctuations also impact Israeli investors. Over the past year, the shekel strengthened about 11% against the dollar, reducing dollar-based returns in shekel terms. Hedging currency risk incurs costs that reduce net returns. Taxation further narrows the gap: a 15% tax applies to interest on deposits, while a 25% capital gains tax applies to real gains on securities. Inflation adjustments also affect real returns, with deposits taxed on nominal interest, often eroding real gains, especially in higher inflation environments.

Investment fees and management costs on index funds or ETFs tracking the S&P 500 reduce net returns by about 0.5% annually, which can amount to roughly 9,000 shekels over ten years on 100,000 shekels. The choice between deposits and equities depends heavily on investment horizon and risk tolerance. Short-term needs favor liquidity and capital preservation, while longer horizons allow for absorbing market volatility and benefiting from higher equity returns.

Ultimately, investors should align their investment products with their financial goals and timelines, considering currency exposure, taxation, fees, and risk. Diversification across asset classes and currencies is crucial, and understanding the impact of inflation and taxes on real returns is essential for long-term wealth growth.