Series I Bonds

Below is the Interest Over Time chart from Google Trends for the phrase “Series i Bonds”… The recent spike shows how popular this has become.

No investment is hotter right now.

Investors aren’t just searching for these bonds on Google, they’re buying them up at record rates as well. As of last week, the I Bond purchases since last November were $6B more than the previous twenty years combined (source: WSJ).

Why are they so popular? Because the “i” in these bonds stands for inflation, so the yield on the bond rises alongside the record high inflation we’re seeing…. The current annual interest rate for a Series I Bond is 9.62% (as of the morning of 6/10/22).

Think about that — 9.62% guaranteed return backed by the full faith and credit of the US Treasury. That’s a smokin’ deal, right? After all, the stock market has averaged about 10% annual returns over the last century, but you have to worry about big ups and downs if you want that kind of growth potential in stocks. On the other hand, these bonds never fall in value. Simply put, the result is stock market like returns without stock market like risk, who wouldn’t want to buy these bonds?

Well, Me, for one.

Here’s why I don’t want to buy these bonds:

The Major Deterrent

Right now, the most an investor can put into a Series I Bond per year is $10,000.

$10,000 x 9.62% = $962 in annual interest

I’m not trying to downplay the impact of $10,000 or $962 in potential return; these sums are extraordinarily meaningful to a populace who has historically under-saved for retirement and unexpected financial needs. However, I’m trying to convey that portfolios and financial plans need to get the BIG things right and $10,000 doesn’t fit that criteria.

There are reports of people circumventing the $10,000 limit by having each spouse invest $10,000, each kid, their trusts, their LLCs, etc… That adds a lot of complexity which I believe isn’t worth it (more on this below).

A client sent me this article last week, Suze Orman No. 1 Investment to Make Right Now No Matter What, which encourages these bonds. This isn’t surprising guidance from Suze Orman, who regularly highlights how people should avoid buying coffee if they want to have $1 million instead…. I can appreciate this kind of “micro finance” for those who need to establish their emergency fund and get started with investing, but once you’re more established we need to zoom out and focus on getting the BIG things right.

Have Janet Yellen shoot me a text if she bumps up the limit to $100,000 or more.

Another Reason = DCA Makes Less Sense

If $10,000 doesn’t excite you and you wanted to have a lot of accumulated wealth in these bonds, you could get there over time by putting in $10,000 in 2022, another $10,000 next year, again the year after, etc… Recurring investments can be a great way to build up a large portfolio.

The term for these recurring purchases is Dollar Cost Averaging (DCA).

DCA is a strategy used by long-term, consistent investors to grow their portfolios. If you contribute to a 401(k), you’re Dollar Cost Averaging. If you contribute regularly to a brokerage account which is automatically invested, you’re Dollar Cost Averaging.

The key component of DCA is that you invest the same amount at regular intervals (like weekly, monthly, annually, every paycheck, or whatever), regardless of what the price of that investment is. In the case of Series I Bonds, the price of the investment never changes — this is a stark difference from the price of stocks, which change constantly.

As mentioned above, the average annual return of the US Stock Market has been about 10% — for the sake of argument, let’s say it was 9.6% to make the comparison between stocks and I Bonds closer.

Below is two scenarios of 10 years of $10,000 annual investments, each with a 10 year average annual return of 9.6%. The investment on the left has no fluctuations (every year is 9.6%). The investment on the right has ups and downs and the average is 9.6%.

*Hypothetical. Not an offer or solicitation or claim of performance. It’s just used to make a mathematical point, okay?

After 10 years and $100,000 in total savings, the green squares show the ending value: $171,554.23 on the stable left side investment, $178,561.95 on the volatile right side one.

Both of these investments had an average annual return of 9.6%, so how could there be a $7,007.72 greater ending balance in the investment that was volatile? Because Dollar Cost Averaging causes an investor to buy more shares of the investment when the market is dipping and less shares when it’s higher.

If you agree that the $10,000 limit isn’t exciting and you’re thinking you want to build up a Series I Bond portfolio over time, I would encourage you to remember two things:

1) If you have a choice between regularly investing a fixed amount into two different investments with similar long term rates of return, it often makes sense to Dollar Cost Average into the one with more volatility, and

2) The recent yield on these I Bonds is the highest since the bonds were introduced in 1998. Inflation this high isn’t likely to stick around, so the high rate of return on these bonds may not stick around either. (Historical rates)

Occam’s Razor

William of Ockham was credited with creating the philosophical rule, Occam’s Razor, which supported the simplest solution as often being the preferred one.

I feel like this is true in investing as well. Keep things only as complicated as they must be.

It’s not uncommon for people to reach out to me with a lineup of accounts similar to the following:

- Husband’s IRA at Schwab
- Wife’s IRA at Schwab
- Husband’s Current Workplace 401(k)
- Husband’s Old 401(k) at T. Rowe Price
- Husband’s Old 401(k) at Fidelity
- Wife’s Current Workplace 401(k)
- Wife’s Old 401(k) at Vanguard
- An Individual Etrade Account
- A Joint Account at Vanguard
- A High Yield Savings Account at Marcus by Goldman Sachs
- Husband Checking at Wells Fargo
- Wife Checking at Wells Fargo
- Joint Savings at Wells Fargo

…Now imagine trying to calculate your net worth with assets strewn about like this.

If you relate at all to the above level of complexity, I get it. Things get complicated quickly.

If this family comes to me, here’s how I would prefer for things eventually look:

- Husband IRA at Schwab or Altruist
- Wife IRA at Schwab or Altruist
- Husband Current 401(k)
- Wife Current 401(k)
- Joint (or Trust) Account at Schwab or Altruist
- Joint Savings and Checking at their Bank

All old 401(k)s get rolled into their IRAs or into their current workplace 401(k), individual account assets get moved into the Joint or Trust accounts, bank accounts are limited to only what is necessary and not redundant.

So how does this relate to Series I Bonds?

If you want to own these bonds you can only buy them from www.treasurydirect.gov.

That’s right, another account, another place where your money is strewn about, and another thing you have to keep track of. If you could easily buy them in an existing brokerage account where your other investments are held, then it would be more advisable. For now, that isn’t a possibility.

Anytime you’re considering adding new complexity to your portfolio design, remember the judgy look William of Ockham’s face below and reconsider.

In Summary

Let’s recap:

1) The current rate of return on these bonds is great, but the amount you can buy is really low.
2) If you’re trying to find a place to regularly put funds via long term recurring purchases, I think there are better options.
3) If you want to own them you need to add more accounts, spread your money around even more, and deal with more overall complexity.

With all of the above said, here’s where I like Series I Bonds.

1) If you have less than $100,000 in your portfolio, AND
2) Your total savings rate is lower than $10,000 a year.

In the above case it’s worth pursuing the guarantee, but this investor also needs to look at how to boost their savings rate. Again, let’s get the big things right.

———-

With that I’ll leave you with one final thought about dealing with inflation.

The absolute best way to handle an inflationary period is to already own the stuff you know you’re going to need to buy.

If you expect prices to continue rising, then it often makes sense to lock in your housing costs for a longer period (rent or mortgage).

If you expect food or non-perishable items to be more expensive, you stock up…

…But you can only sensibly stock so much eggs or milk or laundry detergent, etc., so what should you do if you have extra money after meeting your needs and stocking up at current lower prices?

In my opinion, I think it’s worth buying an interest in those entities which produce the stuff you would like to stock up on. After all, who has more access to the things you think you’ll need than the entities which produce them?

Is your monthly housing budget $3,000 but you only spend $2,000? Consider buying a real estate fund with that extra $1,000.

Is your monthly food budget $1,000 and you only spend $800? Consider buying food stocks within a diversified fund with that extra $200.

As always, you have to do what you feel comfortable with and what you believe you can stick to in these difficult times.

Onward,

Adam Harding | Owner & Founder at Harding Wealth | CERTIFIED FINANCIAL PLANNER
www.hardingwealth.com

If you’re a client, book your annual estate planning appointment here.

*Nothing in the above is investment advice. Past performance is not a guarantee of future performance.