Americans Seeking Investing “Safe Haven”

by Dennis Jacobe, Chief Economist

But will bankers provide a safe place with reasonable rates on deposits?

PRINCETON, NJ -- Over the past six years, Americans' perceptions of the best long-term investment they could make has shifted away from real estate and toward stocks/mutual funds in 2007 and, more recently, to savings accounts/CDs in 2008.

Changing Views of the "Best" Long-Term Investment

In 2002, with housing as an economic bright spot, 50% of Americans thought real estate was the best long-term investment they could make -- and they turned out to be right for several years. Five years later, however, the real housing boom had clearly waned, and the percentage holding this view had fallen to 37%. Given this year's housing bust, just 27% of Americans maintain that real estate is the best long-term investment.

As Americans' views of the best long-term investment have shifted away from real estate, their focus turned has toward other investments. Between the 2002 and the 2007 polls, there was a 13-point decline in the percentage of Americans seeing real estate as the best investment, accompanied by an identical increase in views that stocks and mutual funds were the best investment. Over the past year, there has been another major shift in investment perceptions, with an 11-point increase in the view that savings accounts and CDs are the best long-term investment. This largely offsets a 10-point decline in the percentage seeing real estate as the best investment, and a 4-point decline in those pointing to stocks and mutual funds.


During times of financial market turmoil, investors tend to "shift toward quality." That is, they tend to put more of their money in high-quality, low-risk investments such as U.S. treasuries, and to reduce their holdings of higher-risk investments such as stocks and high-yield corporate bonds. Although the plunging U.S. dollar has led to some questioning of U.S. treasuries as the global safe haven of last resort, the principle of a "shift to quality" was clear as Bear Stearns was bailed out and global financial stability was maintained by the emergency actions of the Federal Reserve Board and the U.S. Treasury.

Gallup's data suggest that a similar "shift to quality" has been taking place on Main Street as the average American's perception of the best place to invest has shifted dramatically during the past few years. Given the current housing debacle, the surprise may be that about one in four Americans still think real estate is the best long-term investment they can make -- not that such sentiments are only about half as high as they were six years ago. The continued confidence in the long-term value of U.S. real estate is a significant positive sign supporting the idea of a strong housing recovery in the years ahead.

Probably the more interesting shift in investment perceptions is the near-doubling in the percentage of Americans pointing to savings accounts and CDs as the best long-term investment they can make. Given the volatility of the equities markets, the bursting of the housing bubble, and the existence of federal deposit insurance up to $100,000, these types of investments are clearly the average American's "safe haven" during times of financial turmoil. This is particularly the case for older Americans who seek investment income but who also are highly risk-averse in the sense that their highest priority is to maintain the value of their capital. Ironically, savings accounts and CDs are generally paying less as interest rates have declined in recent months.

This shift in perceptions about the best place for Americans to put their money could be a major advantage for the nation's banking institutions. Several decades ago, savings accounts and CDs were seen as core investments for older Americans -- totally safe while providing a reasonable investment return. More recently, many older investors have turned to Wall Street for an increasing array of somewhat exotic investment vehicles promising higher returns with minimal risk. The financial crisis of the past year seems to have shifted many Americans' investment perceptions back to the traditional ultra-safe bank deposits so favored by those highly risk-averse in the past -- a process those in the banking and financial industry sometimes describe as "re-intermediation."

Will banks take advantage of this new potential to rapidly grow their domestic savings deposits? Given the "run on the bank" aspects of the Bear Stearns failure, the opportunity to grow the bank's deposit base would seem to be a no-brainer for financial institution managers. However, as is often the case, the situation is not nearly as simple as it seems.

The major portfolio losses of the past year have put enormous pressure on bank management to build margins and profits to help offset these losses. As a result, financial institutions will most likely continue to reduce what they pay for deposits -- even if this limits their deposit growth. The average rate over the past week on a one-year CD is only 2.90% and on a 5-year CD is only 3.25%, according to the Bank Rate Monitor -- less than the current inflation rate. This is certainly not an indication that financial institutions want to take advantage of the higher esteem in which the average American holds savings accounts and CDs in April 2008.

In theory, federal deposit insurance was designed to provide the average American with a safe place to get a reasonable return on his or her savings and investments. Given the financial turmoil of recent times, this investment alternative is particularly important. Bankers who take strong advantage of the current potential for "re-intermediation" and provide a "safe haven" with a reasonable rate of return may discover that they will benefit greatly, not only in terms of increased deposit growth in the short term, but also in increased customer loyalty/engagement over the long term.

Survey Methods

Results are based on telephone interviews with 1,021 national adults, aged 18 and older, conducted April 6-9, 2008. For results based on the total sample of national adults, one can say with 95% confidence that the maximum margin of sampling error is ±3 percentage points.

Interviews are conducted with respondents on land-line telephones (for respondents with a land-line telephone) and cellular phones (for respondents who are cell-phone only).

In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.

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