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 amount to approximately 216,000 shekels at 8% annual return or 197,000 shekels at 7%, compared to about 134,000 shekels from a 3% deposit before taxes. This difference, roughly 63,000 shekels, stems from compound interest effects.

However, the S&P 500's returns are volatile, with notable declines such as a 37% drop in 2008 and nearly 50% during the dot-com crash. 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 rises to nearly 100% over fifteen years.

Currency fluctuations also impact Israeli investors. The shekel's recent strengthening against the dollar reduced the dollar-based gains of the S&P 500 to about 7.6% in shekel terms over the past year. Hedging currency risk is possible but comes at a cost, affecting net returns. Taxation further narrows the gap: a 15% tax on deposit interest and a 25% capital gains tax on real returns from securities reduce net gains but do not eliminate the advantage of stock investments.

Investment fees and costs, such as management fees for index funds or ETFs, also reduce returns. A 0.5% annual fee can cost about 9,000 shekels over ten years on a 100,000 shekel investment. The choice between deposits and stocks depends heavily on the investor’s time horizon and financial goals. Short-term needs favor liquidity and capital preservation, while long-term goals can tolerate volatility for higher growth.

Financial planning should consider individual circumstances, including other assets and risk tolerance. Diversification across asset classes and currencies is crucial. Ultimately, the decision hinges on the ability to remain invested through market fluctuations and the timeline for using the funds.