Do I-Bonds belong in a portfolio?

[Gumby]

Well, I am not hampered by any kind of expertise here, but I will guess that to get a $5K refund, your total payments have to be $5K over the actual tax due. So you will have to figure that or just grab a number big enough that you're sure you've overpaid by the $5K. Withholding is considered to have been paid during the whole year, not in December, so that may help you if you underpaid first quarter, but this SGOTI really knows nothing factual about the situation.

Re quarterly payments, when I was doing them I just paid what my tax guy told me to pay. My guess is that they totaled the safe harbor amount but he is retired so I won't bother him for the answer. My life has simplified since that era so now I just do my own taxes and the December withholding thing. I have never mixed that with quarterly payments.

To get down to the basics, if you pay estimated tax, the IRS calculates how much you should have paid at each waypoint (4/15, 7/15, 10/15 and 1/15) based on your earnings in each of those quarters. If you withhold, however, whether through regular withholding from a job or withholding from an IRA distribution, it is considered to have been withheld evenly throughout the year. So you will avoid under-withholding penalties, so long as you come within $1000 of your ultimate tax bill or pay 110% more than last year's bill, even if that withholding was done solely in connection with a December IRA distribution.

 

[Out-to-Lunch]

I love how a thread whose entire premise was to disparage I-bonds has turned into another thread on how to buy as many I-bonds as possible!

 

[madatrub]

I love how a thread whose entire premise was to disparage I-bonds has turned into another thread on how to buy as many I-bonds as possible!

And im still waiting for the OP to tell us what is getting 9.62% in this market with little/no risk.

 

[pletal]

And im still waiting for the OP to tell us what is getting 9.62% in this market with little/no risk.

I would like to know how also. I am very conservative, but have been saving awhile. If I can get by on a 4% return and put back 10% of that I am ok. Its not for everybody. MYGA are hitting over 4.15 % right now. What is a tax refund?

 

[ERhoosier]

Back to the OP's question.
IMHO I-bonds clearly DO have a place in many portfolios as a long-duration part of a fixed income AA, especially in an inflationary environment. Matching inflation on a tax-deferred basis (unlike TIPS outside retirement accounts) with ZERO principle risk ain't a bad thing. Annual I-bond purchases are limited, but a couple can build a portfolio over time.
Touting "alternative investments" sounds attractive in theory, but in REAL WORLD investing history shows inflation is tough to beat (even just match) without taking substantial risk. Inflation is now the highest in four decades and economic growth appears to be slowing ('stagflation'?). During the last prolonged inflationary spiral among the few 'alternative investments' that beat inflation were good farmland, residential real estate (in some regions), and gold (although gold was flat from '74-'79 while inflation totaled ~50% over that period). Sometimes the best investment strategies for at least part of one's AA are minimizing one's loses in real (inc. after tax) purchasing power.

 

[samcat]

We bought $30k in i-bonds a few months ago...we are thrilled with our 7% now and will be even more thrilled with our 9% in October. Making more off our $30k than in the rest of our portfolio! And, if we sell and lose three months interest, we're still ahead.

 

[gayl]

@Bruceski44,
After reading your biography, I’m surprised to see condescending remarks to other forum members.
There are a wide variety of folks on this forum. Wealth ranges from just starting out to those who have been retired for many years. Some have fat pensions and some live off their savings. Those who live off their savings tend to keep a healthy percentage in safe investments, which may include iBonds. If they’re not for you, fine, but don’t brag to others about it being too small an investment or not earning enough. People do what they can to protect some of their savings while taking some risk in other investments. If you have some wisdom, please share. But please don’t be condescending to anyone.
May God Bless you and teach you charity to others.

+1

 

[JJpop]

With all due respect, I-Bonds put zero dollars in your pocket, except for what you put in. Zero real return, zero alpha.

Some people actually want to have some money in their accounts that they don’t have to worry about.
Investing is about more than just growth. Though I do feel pretty good about how much they are growing right now.
We have some from 2001 that are earning almost 13 pct.

But thanks for letting me know what a horrible choice these are.

 

[gregorit]

At the risk of annoying the I-Bond lovers, I'm totally aligned with Bruceski. Keeping up with inflation is a pretty miserable investment objective, especially when there are caps on exposure, constraints on liquidity, and ceilings on yield.

 

[razztazz]

No liquidity for one year.
Lose 3 months interest if redeemed before 5 years.
0% fixed rate when all other interest rates skyrocketing.
Interest earned just keeps pace with inflation. It may sound great, but that's only because inflation is historically high. At this rate, you put a dollar in, you'll effectively get a dollar out in 5 years.
$10k/per person/per year Purchase limits.
When inflation returns to "normal" your returns return to 2-3% APR.
The benchmark CPI-U badly underestimates the real inflation we've seen in food and energy.

These facts reduce the attractiveness of I-bonds. I bought $40k worth, but wouldn't buy more and am not on the I-bond bandwagon. If it seems awesome to you, maybe it's because you've been brainwashed into thinking 2-3% APR on bonds or 30 year CDs is great. Current monetary policy penalizes savers and encourages alternative investing.

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I haven't chimed in because saying "does something belong" in a portfolio is sort of a philosophical question. Not even sure what "belong" means here. You can build a portfolio any way you want and make it work.


But what came to mind was Harry Brown's portfolio with 25% gold. Wouldn't I-Bonds, in effect, be filling the place of gold in that portfolio? I know with purchase limits, maturation dates, and the planning and juggling that would come into play, it might not even be all that workable, but as a portfolio asset it's there to guard inflationary times, and otherwise the asset is guaranteed.

 

[OldShooter]

... But what came to mind was Harry Brown's portfolio with 25% gold. Wouldn't I-Bonds, in effect, be filling the place of gold in that portfolio? I know with purchase limits, maturation dates, and the planning and juggling that would come into play, it might not even be all that workable, but as a portfolio asset it's there to guard inflationary times, and otherwise the asset is guaranteed.

It's weak equivalence because gold is so wildly volatile vs the completely boring I bonds. The two are probably only weakly correlated, too, except maybe over fairly long periods. Finally, I bonds are not subject to state income taxes, which gold gains are.

Also, are you saying that gold is guaranteed? Please tell me where I can get some of that.

 

[Magus]

Am I missing something? A $10k annual limit equates to .05% to 2% of the investments of most folks here. All this quibbling over an $800 - annual return?

A couple that started in Nov last year could already have $60k queued easily with gifts for early 2023 queuing and really as much as $100k if you go out to 2025 gifts, which is only 2.5 years from now. That’s nearly $10k this year in interest with zero risk. Getting rich? Nope - but $10k is 1/7 the median household income for almost no work and loads better than similar risk investments.

 

[OldShooter]

At the risk of annoying the I-Bond lovers, I'm totally aligned with Bruceski. Keeping up with inflation is a pretty miserable investment objective, especially when there are caps on exposure, constraints on liquidity, and ceilings on yield.

How are your straight Treasuries doing lately? It seems to me that not keeping up with inflation is even more miserable.

The goal has to be to get the best possible total return for a given risk level. From an investment POV it really doesn't matter whether that best possible return is numerically positive or negative. From a psychological POV, as many posts on this forum (including yours) attest, it can matter quite a bit.

 

[Magus]

$20K/year per person and interest at almost 10%, is that not $2K/year?

Well, it may not be much, but it helps buy some Wagyu beef that Robbie keeps pushing here.

Yummy

 

[Happyras]

Between my wife and my own TD account we could literally gift out as many years as we will live. That could stash $400K in I-bonds pending gifts. We are limiting it to 2 more years for each of us, plus more for kids and GKids. I think holding for longer terms as a gift box item should not really be as worth while if you believe inflation will come back down to 3% range. If that occurs, equities should be back on track for typical average returns around 8%. However in the interim, I strongly believe we are in for a very flat return on equities until we see normal PE's of 16 range. SPY is at 20.05 PE still, more room to go. That said, I-bonds are very much a part of our portfolio of deferred taxable returns, for both of us and our heirs.

 

[Magus]

At the risk of annoying the I-Bond lovers, I'm totally aligned with Bruceski. Keeping up with inflation is a pretty miserable investment objective, especially when there are caps on exposure, constraints on liquidity, and ceilings on yield.

It is, but what else can you get right now even close to that yield? The only bonds over that yield today are CCC and worse bonds and those are still at risk to higher inflation and of course bankruptcy.

Stocks have a huge negative real and nominal yield YTD. Bonds have huge negative real and nominal Yield YTD. Gold is flat nominal and down real. Silver is down on both. Only private residential real estate has done better so far as a group and oil and gas of course.

In short it’s not attractive because it keeps up with inflation, it’s attractive right now because it’s risk adjusted returns are higher than anything else in the market entirely right now. And there are ways to increase your ibonds in the short term. Sure if you have a $25+ million portfolio it’s probably not worth it. For folks with $0-$5 million, why would you not?

 

[cj1717]

Really? I did not realize I was being brainwashed. And here I am, an educated man, thinking that the current Ibond rate, even if held for only a year and then sold still puts more dollars in my pocket that other investments of similar safety available to me at this time. How foolish of me.

LOL. I agree with you.....I bonds are the ONLY deal going!

 

[jldavid47]

Maybe you need to go back to the drawing board if your education has left you with the notion that staying even with inflation is good.

Maybe you need to go back to the drawing board if your education has left you with no concept of risk-adjusted returns.

 

[jldavid47]

With all due respect, I-Bonds put zero dollars in your pocket, except for what you put in. Zero real return, zero alpha.

Right now, your assets keeping up with inflation is damn good.

Over the past 12 months the real return on I-bonds is 0% by your reckoning. The real return on the S&P 500 is -20.4% (-11.8% nominal return - 8.6% inflation) plus some paltry dividends.

 

[jldavid47]

The benchmark CPI-U badly underestimates the real inflation we've seen in food and energy.

Really? Prove it. CPI-U includes food and energy. How exactly are those components being underestimated?

 

[kingle]

IBonds -- I'm Sold

As others have mentioned, iBonds are part of my secure, safe, emergency, cash like 'portfolio'. With current yields above 9%, inflation probably pesky for a few years - I figured - why not? They offer a much higher return than what my credit union pays. Even with a 3 month penalty within 5 years - the return in that year may be higher, with penalty, than my safe credit union cash account. AND, they're free of state income taxes, somewhat offsetting the 3 month penalty.

I think comments adverse to the iBonds view them as long-term investments and part of a long-term portfolio. With returns that could drop to zero - they're not that attractive. For my "safe" - "emergency" needs they're fine.

Other users have not mentioned the ability to gift iBonds. You can go above the 10,000 limit via gifting. So.. I bought 10,000 each for my wife and me this year and 5000 with a tax refund. We can each 'gift' each other additional funds and keep the gift deposit in a gift box. The clock starts running at the time of funding, including earning interest in the gift box. We could then in 2023 send the "gift" to each other for our 2023 funding limit. IF, iBond rates look attractive in 2023 - I will fund additional gifts...

Again, I'm looking at these as 'emergency' funds with intended use of major house repairs or car replacement.

 

[pb4uski]

I'll stick with i-bonds for the one year minimum and then only as long as their yields are competitive with other similar alternatives... if if gets to the point that they are yielding 2% and CDs or UST are yielding more, then I'll sell them even if I have to forfeit 3 months of interest... it is no different than the decision to cash out a bank CD, pay the early withdrawal penalty and reinvest at higher rates... there is no need to think of them as a long-term investment.

 

[Montecfo]

I think I-bonds are very attractive as an investment.

Name another investment that tells you your return for the next 6 months--in advance?

And if it is not an investment then I guess I need more "non-investments" that are beating the pants off the stock market.

 

[Gumby]

I'll stick with i-bonds for the one year minimum and then only as long as their yields are sompetitive with other similar alternatives... if if gets to the point that they are yielding 2% and CDs or UST are yielding more, then I'll sell them even if I have to forfeit 3 months of interest... it is no different than the decision to cash out a bank CD, pay the early withdrawal penalty and reinvest at higher rates... there is no need to think of them as a long-term investment.

Exactly my plan as well.

 

[finnski1]

Exactly my plan as well.

+2. I don't get the animosity towards I bonds by some on here. It's simply another vehicle to try to keep a small portion of ones portfolio above water for the short term. Like any investment, I constantly reevaluate and move on as time goes on. I am not wedded to them.