I, Said the Bond: What Lies Next for the I Bond
I, Said the Bond: What Lies Next for the I Bond
Last year, as the frenzy of the 9% I-bond ravished the country I wrote about it in my blog. I attempted to point out that although the current rate is attractive, buyers beware. Now, I mean this as I often do, in a way to put things in perspective. It certainly is hard to suggest that in 2022 it was a bad investment. Heck, stock and bond markets were both down double digits, while I bonds gave you a hefty return last year. I’d go as far as saying short of the energy sector last year they were likely the best-performing asset class.
My point last year was for investors to be careful as the allure has some major drawbacks. The first is the liquidity (or expected time horizon), the second is the relatively small amount you can invest in them ($10,000 per person or $15,000 if you use tax refund to acquire), and the last is that THE RATES RESET EVERY 6 MONTHS.
Fast forward to May 2023 and we are set for a new rate reset in I bonds. The new rate, which will be set for the next 6 months, is estimated to be an annualized 3.8%! You are reading that correctly, for the next 6 months your I bonds will be cutting their rates roughly in half. Why? Simply put, inflation has been coming down substantially. For comparison purposes, my high-yield savings account is now paying 4% and has no real liquidity issues or maximum amounts that I can “invest.” In other words, the so-called “investment of a lifetime” from the last 18 months or so is now expected to yield less per year than a bank savings account.
Why do I bring this up? It isn’t an I told you so, as we did agree that for a small amount of cash and the right expectation they were a fine spot for excess liquidity. Rather, I mention this as a form of perspective. Perspective that running from equities when they are down in hopes of chasing the next great thing isn’t an investment strategy. Perspective that selling low and buying high is not an investment strategy. Perspective that having a sound investment strategy and sticking to it is indeed an investment strategy.
This is far from me claiming that equities will continue their rebound this year or not. Rather it points to the fact that things revert to their mean. Purchasing a low-risk inflation bond during a super-high inflation environment may seem like a great idea, and for many, it may have been. But I think you must really assess why you are acquiring these things. If a little hedge on some cash sure why not, you won’t get crushed. If as a long-term investment, these things have 30-year maturities and 5-year minimum holds, then expect they will return what they historically have, especially knowing that the Fed is actively working against you in the short term.
I am of the firm belief if you are investing for the long term and want equity-like returns then simply seek out the asset class that is most likely to give you those equity-like returns…..EQUITIES! What we know about equities is that they have historically returned roughly 8-10% per year. What we also know about equities is they almost never return 8-10% in a given year. In other words, this means that to receive this incredible accretion on your assets you MUST, AND I MEAN MUST, be willing to partake in both the good years and the bad (since no one can accurately predict them all). These historical returns are over long periods of time and investors need to approach it through that lens.
At the end of the day, my point above is likely my real reason for writing an update on I bonds. Not only to simply inform those who purchased or didn’t as to what the new rates will be but rather to educate you to understand why you are investing in something. If it is a new investment strategy or simply a one-off it is important to remember things inevitably revert back to their mean. Thus, when considering any investment strategy, it is critical to ascertain the what and the why you are investing in something so you can plan based on your overall investment expectations for the long term, not the short term.
Hope you enjoyed this little update and perspective. As always stay wealthy, healthy, and happy.
