December 7, 2022

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This Absolutely Brilliant Way to Invest $10,000 Is About to Get Even Better

Good things don’t last forever. However, sometimes they stay around for a while. And in a few cases, they even become more appealing as time goes by.

You can probably think of a few examples that fit the bill — perhaps a classic song or a favorite wine. But there’s also something that belongs on the list that can make you a tidy sum of money. Here’s an absolutely brilliant way to invest $10,000 that’s about to get even better.

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Rising with inflation

In most cases, inflation is the enemy of investors. There are multiple repercussions when prices rise, most of which are bad.

For example, the Federal Reserve typically looks at raising interest rates to fight inflation. These moves can cause most stocks to fall and sometimes even lead to a recession. Higher interest rates tend to throw cold water on real estate markets. And most bond prices fall as rates go up.

However, you can buy Series I savings bonds beginning on May 1, 2022, that are expected to offer an annual interest rate of 9.62%. That’s higher than the current I bond interest rate of 7.12%. 

This great investment alternative is getting even better not in spite of inflation but because of inflation. The “I” in I bonds actually stands for inflation. The rates for the bonds are set based on Consumer Price Index for all Urban Consumers (CPI-U). 

Series I savings bonds are issued by the U.S. Treasury Department. They’re backed by the full faith and credit of the U.S. government, making them among the least risky investments you’ll find.

The fine print

Is this too good to be true? Nope. However, it pays to read the fine print.

First of all, don’t expect to plunk most of your investment portfolio into I bonds if you have a lot of money saved up. You can only buy $10,000 worth of electronic I bonds per year. You could also purchase a maximum of $5,000 worth of paper I bonds. The catch is that these paper bonds can only be purchased with federal income tax refunds. 

Your interest rate will likely change in November 2022. That’s because I bond rates are set twice per year (in May and November). If inflation eases up, the interest rate for the bonds will be reduced.

However, the interest rate on I bonds can never go below zero. This means that the worst annual interest you could receive is 4.82% (assuming the May rate is set at 9.62% and the November rate is 0%.) Of course, it’s highly unlikely that the rate will fall that much in six months. 

You also must hold Series I bonds for at least one year. If you sell the bonds before five years have passed, you’ll forfeit any interest from the previous three months.

Is there a better alternative?

Sure, there are other smar ways to invest in a high-inflation environment. Many real estate investment trusts (REITs) have inflation riders built into their leases. Some stocks could beat inflation due to their strong pricing power. You can also buy Treasury Inflation Protected Securities, or TIPS, which have interest rates pegged to inflation.

But REITs and other stocks don’t come with the guaranteed returns that I bonds do. And TIPS have much lower interest rates than I bonds (the current TIPS rate is 4.25%).

I don’t think that there’s a better alternative for investing $10,000 than I bonds. Just remember that — like all good things — those great interest rates won’t last forever.


https://www.fool.com/investing/2022/04/24/this-absolutely-brilliant-way-to-invest-10000-just/