What if I said I could offer you an investment with a guaranteed return of 9.6%? There’s no chance of loss. Would you be interested?
Believe it or not, such an investment exists today. And it’s something you should highly consider if you have excess cash sitting in a savings or checking account.
Before telling you more about the investment, it’s important to put that 9.6% guarantee in proper context.
Since 1929, U.S. stocks have increased by an average of 10% a year. But those returns were far from guaranteed. In fact, to have successfully collected that 10% return, you would have had to hold on through multiple periods where stocks lost more than 40% of their value. It was a bumpy ride.
So back to our investment with a 9.6% return. Obviously, at that rate, we are looking at stock-like returns. But the investment isn’t a stock. Not even close. In fact, it’s a bond. But not just any bond. It’s a savings bond – yes, a stodgy government-issued, interest-bearing security – with a special twist.
It’s called an “I” bond. The “I” stands for “inflation.”
What makes I bonds special is the interest rate they pay is pegged to economic inflation. Investors purchase them to ensure their money isn’t silently chewed up by inflation. Savings accounts and other ultra-conservative investments can’t do the same.
But unlike run-of-the-mill bonds – such as Treasury bonds, mortgage bonds, or corporate bonds – I bonds have no risk of price loss. It’s an ideal investment for those who get jittery about stock or bond market losses.
How can that be? How can there be an investment with stock-like returns but with no chance of loss? Well, there are plenty of technical reasons, but suffice it to say we live in interesting times.
With those characteristics, you would be crazy not to consider loading up on I bonds. They are as safe as it comes. Plus, the interest the bonds pay is free from state income taxes. So, what’s the catch? Why not exclusively buy I bonds, collect the bountiful return, and enjoy a stress-free investment portfolio? Should you swear off stocks and other types of bonds forever?
It’s not that easy.
As attractive as I bonds are – and they are definitely attractive right now – there are some drawbacks.
The biggest is that each person can only invest $10,000 per year in I bonds. There are some ways around that by using a business entity or a trust, but most people are going to be limited on how much they can invest.
In addition, I bonds lock your money up for one year. After one year, you can return the bond back to the U.S. government, but you get hit with a penalty of three months of interest. If you hold the bond for more than five years, however, you can redeem it at any time with no interest penalty.
Oh yeah, and that guarantee of earning 9.6%? It’s good only for the next six months. The return for I bonds is set every six months. So the current rate is good until a new rate is announced in November. If inflation goes higher from here, the new rate could be higher than 9.6%. But I wouldn’t count on it. As inflation cools, the guaranteed rate is likely to fall.
One last downside: You must buy I bonds directly from the U.S. government. That’s not necessarily a bad thing, but the only way to purchase them is through www.TreasuryDirect.gov. And the website is a clunker. In fact, from its appearance, it may have been the first site ever launch on the internet. Just beware, it’s not exactly user-friendly.
So, there you have it. Those are the basics of I bonds. They may not be sexy, but they are definitely worthy of your consideration.
But good luck navigating that website. You’ll earn that 9.6% return in more ways than one.
Justin Lueger is President of Invisor Financial LLC, a registered investor adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at firstname.lastname@example.org.