High-return safe investment

I receive a lot of questions about money. These questions often vary depending on the person who asked the question and her needs, but I most often receive the question: “What is a high-return security investment?”

In the past ten years or so, I have no answer to this question. Savings accounts and certificates of deposit are of course safe, but they are no longer attractive investments. Since the Great Recession of 2008/2009, interest rates have remained alarmingly low. This is by design. The government doesn’t want you to deposit money in a savings account. They want the money to circulate in the economy.

In the long run, the stock market provides excellent returns. But when people demand “safe” investments, they want to avoid short-term fluctuations, which means that stocks are impossible. (Things like Bitcoin and precious metals are even more impossible!)

However, today, while catching up with my blog reading, I stumbled upon Link from Michael Kitces weekly financial planner roundupThe story he shared surprised me.Write Wall Street Journal, Jason Zweig explained Safe, high-return transactions hidden in sight(This article is behind the paywall.) A safe, high-return transaction? US government I series savings bonds.

These inflation-adjusted bonds currently have an annual yield of 3.54%!

Zweig wrote:

Economists say that there is no free lunch, but the I bond provides the US government’s guarantee that you can recover your original capital and any increase in the official cost of living in the process. The only problem is that this is not an all-you-can-eat buffet: the maximum purchase amount per account holder per year is $10,000 (unless you choose to get a tax refund in the form of an I bond).

The irony is that the less you earn and have to invest, the stronger my bond instruments.

Because I am not familiar with I Bonds, I spent a few hours reading them today. I think I will start adding them to my portfolio. You might like it too. Let me share what I have learned.

Basic knowledge of I bonds

Series I savings bonds (or “I bonds” for short) are inflation index bonds with variable interest rates. The variable interest rate includes two components.

• Fixed rate. On the first working day of May and the first working day of November, the U.S. Treasury Department will adjust this fixed interest rate for new bonds. But once you purchase Series I bonds, this fixed interest rate will never change. If the fixed portion of I Bond is 2.10% when you buy it, it will remain at 2.10% for 30 years (or until you sell it).
• Variable interest rate linked to inflation. This ratio will also be adjusted in early May and early November. It is based on changes in the consumer price index. Currently, the “half-year inflation rate” (officially called) is 1.77%, or 3.54% yearly speed.

The fixed interest rate and variable interest rate components are added together to generate the current compound interest rate. Because inflation may become negative (Also known as Deflation), variable interest rates may also be negative. When this happens, the current yield of your I bond may be lower than the fixed interest rate.However, the interest on these bonds can be no way The output is below zero. They will never lose value.

Interest is compounded every six months. I bonds are exempt from state and local taxes, but are subject to federal income tax on redemption.

Does all this sound complicated? It’s not, really.

When you buy Series I bonds, you lock in a fixed interest rate. Then, every six months, the variable interest rate is adjusted for inflation.

Currently, the fixed interest rate of Series I savings bonds is zero. In fact, the fixed interest rate of all Series I bonds issued since May 2008 has been below 1%. So why would you consider adding them to your portfolio? Because despite the low fixed interest rates, the benefits of these things still exceed savings accounts and certificates of deposit.

Now, having said that, the cash you put into these bonds is much less liquid than the money you put into the bank.

• you must Hold the bond for at least one year. You can never redeem a Series I bond until it is 12 months old.
• You can redeem the bond after one year. However, if you have not held the bond for at least five years, you will lose the accrued interest for the last three months.

You also need to understand some other shortcomings.First, you can only purchase I bonds electronically from the following website Ministry of Finance directly(This is the official website of the US government, so it is safe. Or it should be.) Secondly, you can only buy $10,000 of I bonds each year.

Am I talking about “only”? I lied. Kind of.you can also Use your income tax refund to buy I bonds. Doing so can give you an additional $5,000 I Bonds per year.The bond purchased in this way is Paper Bonds are not electronic.

With regard to these investment tools, you may also want to know some other little things.If you want to know more information, please check the official Frequently Asked Questions about Series I Savings Bonds. (You might also like This table compares I Bonds and TIPS, Treasury inflation-protected securities. )

I use numbers as a link

Because I am a money fan — and because I am curious — I created a spreadsheet that records the historical Series I bond yields since the September 1998 issue. (This is based on Official form directly from the Ministry of Finance, But I have made it more beautiful and easier to update in the future. )

This is a very wide spreadsheet, so it will not be readable on this screen. You need to open the image in a new tab. (Click on the picture should Do it for you. ) Even so, you may need to manually resize the image to read it.

Here is how to read this spreadsheet.

• Each row tracks the interest rate of Series I bonds issued within that range. For example, the “05/08 – 10/08” line tracks changes in interest rates for bonds issued from May to October 2008. The first number in each row (“fixed rate” in the green column) shows the permanent fixed rate of bonds issued during this period. For “05/08 – 10/08” bonds, the fixed interest rate is 0.00%.
• Each column tracks the half-year change in interest rates. The Ministry of Finance adjusts interest rates on May 1 and November 1 (or later). The first row of each column shows the official inflation rate used to calculate the total bond yield. Therefore, you can see that the “May-08” column indicates that the half-year inflation rate is 2.42% (that is, the annual inflation rate is 4.84%), and the rest of the column shows the effective interest rates of various bonds.
• I also tried to compile historical data on the average certificate of deposit interest rate. However, I have not found a source of this information that I trust and like, so I am willing to accept suggestions. (I also want to find the source of historical savings account data. I have searched for years, but I have never found anything I like.)

Looking at this spreadsheet, you can see that I Bonds does not always Outperforms five-year certificates of deposit-but they usually do. On several occasions, even a one-year CD can provide better returns within a few months.

Bottom line

I have never bought a savings bond. This is about to change.

I like the idea of ​​using I Bonds as a medium-term investment tool-saving for the house, saving for college education, etc. If your time span is more than five years but shorter than fifteen years, these are an attractive option. especially If it’s money, you can’t afford to lose. Now, I like them more than savings accounts or CDs!

For longer time horizons and funds that can bear greater risks, your situation will be better Investment Index Fund. In the long run, the yield of Series I bonds is not as good as that of stocks. In any case, it is not based on historical averages. But this is not the point. These bonds are not meant to increase your nest egg. They are designed to ensure the safety of your nest eggs.

Even if these are not attractive to you now, you should pay close attention to Series I bonds to understand where their fixed interest rates are going. If they climb to the 3% range (as they did more than 20 years ago), it would be a great deal.

renew: Can I retire? An article has just been published comparing two types of inflation-protected government bonds: Series I Bonds and TIPSIf you are interested in this type of investment, useful information will be provided here.