Stability without growth: the price of a bank deposit

There is a recurring “trap” investors step on again and again: treating current yield as expected return. This is particularly evident today with bank deposits in Russia. In recent years, rates have been in double digits. And it creates the impression that this is the “normal” return of the instrument.

But the deposit rate is not a characteristic of the asset — it is a derivative of the regulator’s monetary policy. It changes along with the phase of the economic cycle and cannot serve as a basis for long-term planning. Relying on current yields almost always leads to overstated (or understated) expectations, missed opportunities, and ultimately disappointment.

From intuition to data

There is no need to look far for confirmation. The UBS “Global investment returns yearbook” states that from 1900 to 2025, the real return of money market instruments (that is, return above inflation) was about 0.5% per year in US dollars, compared to ~1.6% for bonds and ~6.7% for equities. This is a fundamental reference point: deposits and short-term bonds provide liquidity and sometimes preserve purchasing power. But they barely grow capital in real terms.

Even if we look at current conditions, the conclusion does not change. For example:

• US: deposit rates (1-year CD) ~1.5%, inflation ~3.3%
• Eurozone : ~1.9% and ~2.6%, respectively

In Russia, the pendulum has swung in the opposite direction. Major banks offer 10–14% on 1-year deposits with inflation around 6%. A positive real return. But this is not a new normal — just a point along the path of monetary easing.

A deposit may outpace inflation at specific moments in time. But it is not a tool for sustainable capital growth.

The key to understanding lies in the nature of the policy rate itself. Central banks usually define a “normal” level in their reports. According to the Bank of Russia, the neutral rate lies in the range of 7.5–8.5%. In the coming years, the regulator expects further easing. Current double-digit yields are temporary.

Similar cycles are observed in developed economies:

• In 2021, US deposits yielded just 0.5% annually (compared to 1.5% today)
• Eurozone: ~0.3% in 2020 → 3%+ in 2023 → ~1.9% in 2026

Beyond today’s Russia, history offers other periods when money market instruments outperformed equities.

For example, in the US in the early 2000s, after the dot-com bubble, the equity market (S&P 500) delivered negative returns for three consecutive years: −9% in 2000, −11.8% in 2001, and −22% in 2002. At the same time, 3-month US Treasury bills returned +6%, 3.5%, and 1.6%, respectively.

A similar situation occurred recently: in 2022, equities fell by about −18%, while T-bills delivered around +2%.

This raises a natural question: if equities can decline for years, why take on additional risk?

To borrow Tolstoy’s phrasing, deposits win individual battles, equities win the war. Long-term data confirms this.

$100 invested in US equities at the beginning of 1928 would have grown to $1.16 million by the end of 2025, including dividends. In contrast, short-term government bonds would have increased the same amount to only $2,600. Since the start of the 21st century, global equities have delivered real returns of around 3.5% per year, according to UBS.

Easy: just buy at the right time

Trying to fix the problem with “timing” sounds logical. Keep money in banks while rates are attractive. When equities start to rise, buy them. Then, during market declines, move back into deposits. Simple enough.

But there is a problem: no one knows in advance when one phase of the cycle will give way to another. According to estimates by J.P. Morgan Asset Management, $10,000 invested in the S&P 500 from 2006 through 2025 would have grown to $80,619 — assuming continuous market exposure. Missing just the 10 best days cuts that result by more than half — to $35,866. Missing 20–30 such days leads to even worse outcomes.

The best-performing days often follow the worst. Leaving the market to “wait it out” almost always means missing out.

People manage to worsen their results even without active trading. Morningstar estimates the “behavior gap” of semi-passive investors at around 1.2% per year. This reflects the difference between the total return of a fund sample and investors’ personal returns (IRR). The former assumes constant market exposure, the latter accounts for actual cash flows. Most investors buy high and sell low, when the opposite is required. Hence the gap.

DALBAR reports an even larger lag behind the index in certain periods. In 2024, the average investor earned about 16.5%, while the S&P 500 returned 25%. The gap exceeded 8 percentage points. The reasons are straightforward: fear, reaction to news noise, and attempts to avoid drawdowns at any cost.

It is worth noting that consistently outperforming indices is possible. I wrote about this, with examples, in RBC in April 2025 here . But do not overestimate yourself: it requires either professional skill or working with a professional.

In this context, deposits are psychologically comfortable. They:

• hide volatility
• create a sense of control
• require no decision-making

But the price of this “stability” is the absence of growth.

“All of this makes sense,” you might say, “but how does one apply it in practice?” Capital structure, risk allocation, and instrument selection are processes that deserve careful attention. I describe this in more detail here .

Separation of roles

A deposit is a tool for liquidity and short-term capital management. It is useful — and often necessary — as part of a financial buffer. A portion of capital typically calculated based on a family’s cost of living over a 12-month period.

For everything else, equities are generally more appropriate. Returns here are volatile and, at times, painful. But equities as an asset class have historically driven real wealth creation.

As Warren Buffett once wrote, investors tend to “imagine the future while ignoring the economic reality of the business.” With deposits, a similar pattern emerges: investors “imagine” the future by extrapolating current rates indefinitely.

The market is not wrong. The mistake lies in how we interpret returns. And it is this mistake that most often costs investors their capital.