Over the last couple of years in a higher interest rate environment, the appeal of I Bonds went from Zero (kind of like their returns prior to 2021) to Kardashian-level break-the-internet appeal.
Many clients have asked if they should get on that train. My answer – as always – is “it depends.”
Last week’s blog explained how I Bonds work, so check that out for the basics.
You might wonder, “Why bother with I Bonds when I can just throw my money at the latest stock everyone’s buzzing about?” Good question. I Bonds are low-risk and offer a decent return, especially when inflation is high. They’re the tortoise in the investment race—slow and steady, but with a sneaky advantage when times get tough.
How would you use I Bonds on a practical level? First off, don’t go overboard. I Bonds are great, but they’re not a silver-bullet investment. They should complement, not dominate, your diversified portfolio.
Actually, the limits on how many you can purchase at a time ($10,000/person) keeps you from going too crazy with loading up on individual I Bonds.
- Rainy Day Fund: Use I Bonds as part of your emergency fund. They’re safe, earn interest, and can be cashed in after one year (though you’ll lose the last three months’ interest if you cash them before five years). It’s like having a piggy bank that grows a little more each month.
- Inflation Hedge: Remember that time you bought a loaf of bread and your wallet cried? Yeah, inflation hurts. I Bonds can cushion the blow by maintaining purchasing power. Allocating a portion of your bonds or fixed-income investments to I Bonds can keep your overall returns buoyant when prices rise.
- Diversification: I Bonds are a foil to the volatility of stocks. They provide a safety net when the stock market feels like a rollercoaster operated by a caffeine-crazed teenager. A balanced mix of stocks, bonds, and I Bonds can make your portfolio robust enough to weather financial storms.
Incorporating I Bonds into your portfolio can be a smart way to take some risk out of the mix or prepare for short-to-medium term future expenses.
Like all investments, there will be years when you love your I Bonds for their lovely rates and safety, and years you curse them for their sad performance compared to your stocks. The key, as ever, is patience.
