Scanning The Wasteland Of 'Super-Safe' Fixed-Income Investments

May 09, 2016 1:40 AM ET5 Comments
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Tipswatch
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Summary

  • The 'no-risk' fixed-income market has become a low-yield wasteland, with rates dropping in 2016.
  • I Bonds at least offer a return that is guaranteed to beat inflation.
  • FDIC-insured CDs have appeal because of short terms and promotional rates.

Although I write exclusively about boring, very safe investments like I Bonds and Treasury Inflation-Protected Securities, I don't advocate putting all your assets into this type of investment. Instead, I recommend making them part of your asset mix.

The 'big picture' of my personal investing style is 60% bonds, 40% stocks. That's fairly low risk, but on the bond side, I try to reduce risk even more by including extremely safe fixed-income investments. The result is something like this:

  • 10% highest risk: International stock funds, smaller-cap stock funds, growth funds
  • 30% higher risk: Total stock market funds, S&P 500 funds, total international funds, etc.
  • 35% lower risk: Broadly diversified bond funds, TIPS funds, municipal bonds, municipal bond funds
  • 25% no risk: TIPS held to maturity, I Bonds, EE Bonds, insured bank CDs, insured savings, Treasurys held to maturity

The problem with this investing style is that the 'no-risk' market has become a low-yield wasteland. And in fact, midway through 2016, it's very difficult to find suitable investments. Here is a look at the major categories, and their pluses and minuses.

I Bonds versus TIPS: If you purchased an I Bond today - you probably wouldn't, but stick with me - you'd earn a permanent fixed rate of 0.1% and a six-month inflation variable rate of 0.16%, for a composite rate of 0.26%, annualized. That's horrible!

But you know what? An I Bond purchased today is a much better investment than a TIPS purchased today. Take a look at the chart. The most-comparable investment term is 5 years because an I Bond can be sold after 5 years with no penalty. A 5-year TIPS purchased today will lag inflation by 0.28%. An I Bond purchased today will beat inflation by 0.10%. That's a 38 basis-point advantage for the I Bond. Plus, you get tax-deferred interest, better protection against deflation

This article was written by

Tipswatch profile picture
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I am no longer writing for this site. More details. I will continue to post updates at my site, TipsWatch.com.-----David Enna is a long-time journalist based in Charlotte, N.C. A past recipient of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website. The Tipswatch blog, which launched in April 2011, explores ideas, benefits and cautions about U.S. Series I Bonds and Treasury Inflation-Protected Securities, which David believes are an under-appreciated and under-used investments. David has been investing in TIPS and I Bonds since 1998.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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