The safest place to store your money right now
The stock market has been extremely turbulent in 2020, plunging into the coronavirus-inspired bear market, but then surging back to send some stock indices to new all-time highs. The amount of volatility threw even seasoned investors into a loop.
Many are worried about their ability to survive what could be a major recession in the months ahead. Moreover, as the number of COVID-19 cases increases, the prospects for another damaging round of business closures become even more alarming.
Now is not the time to panic, especially if you have stayed the course and kept your portfolio relatively unchanged throughout the year so far. Now that stock market benchmarks have rebounded, it’s a good time to consider whether you should rebalance your investments to bring risk levels back in line with your comfort level. If that translates into extra cash, you can make a smart move that will help protect you against a key risk that every investor faces today.
The danger of inflation
Inflation hasn’t been a big concern for investors for decades. You have to go back to the oil shocks of the late 1970s and early 1980s to find a time when US market participants had to worry seriously about inflationary pressures.
Yet the extreme measures taken by central banks and the federal government to foster economic growth have some market watchers worried about the future. With trillions of dollars worth of stimulus packages so far — and more likely on the way — it’s natural to fear that all of this spending could eventually lead to a loss of faith in the government’s handling of its responsibilities. budgets.
These concerns largely explain why the prices of traditional inflation hedges like gold and silver have increased significantly. In addition, US Treasury Inflation-Protected Bonds – also known as TIPS – have become so popular that their real interest rates have fallen. negative.
However, there is an alternative that individual Americans have exclusive rights to use. Most people don’t even consider US savings bonds a real investment, but one particular type of savings bond does a better job of protecting against inflation than any other choice.
Fight inflation with I Bonds
I bonds – short for Series I US Savings Bonds – are designed to protect savers from inflation. Rather than carrying a fixed interest rate that you will receive throughout the period that you hold the savings bond, I bonds see their rates fluctuate every six months.
Currently, I bonds offer a real rate of 0%, which means that they pay no fixed interest. The only income they generate comes from the increase in their value linked to their link with the consumer price index (CPI). The I bonds you buy currently bear a rate of 1.06%, because the measure of inflation used by the I bonds increased by 0.53% in the six-month period from September 2019 to March 2020 This rate will apply for the first six months, and then the government will calculate a new rate based on the inflationary variations between March and September of this year.
Admittedly, 1.06% is not a great return. But keep in mind that the rate will fluctuate up and down. It cannot go below 0%, but it can go as high as needed to keep pace with inflation. For example, in the previous six months, I bonds paid 2.22% interest.
Moreover, the real rate at 0% is much better than what institutional investors are doing. Right now Treasury investors accept 0.15% interest over two years cash notes without inflation protection. TIPS with five-year maturities pay 1.15 percentage points below the inflation rate. Even with longer maturities, the news isn’t any better, with 10-year TIPS yielding -0.91% and 30-year TIPS yielding -0.35%.
Store some cash with I bonds
I bonds were not designed as a short-term parking spot for unlimited money. Investors face an annual limit of $10,000 on I bonds per person. You cannot cash in an I bond for 12 months, and if you do so before five years have passed, you will lose three months of interest.
However, by providing investors with inflation protection, I bonds have unique characteristics that you won’t find in most investments. With all the uncertainty surrounding the stock market right now, downside protection looks quite attractive. Take a closer look at I bonds if you have the cash to spare and you might like what they offer you.