Investing, Student of the Market
Ryan Weiser
Student of the Market - February 2024

Stay ahead of the markets with timely insights by uncovering the latest on the global economy, geopolitics and retirement, among other timely investment ideas - Student of the Market - February 2024

Student of the Market - February 2024

Investing

Understanding the Pros & Cons of Series I Bonds

Purchase Limitations, Lock-up Period, & Real Returns All Need to be Evaluated

Series I bonds are U.S. savings bonds designed to protect the value of your cash from inflation. And with inflation surging to 40-year highs, investors are especially interested in higher-returning, lower-risk investments.

But before making a decision to rush out and buy I bonds, make sure you understand the pros and cons first. This is critically important given that most will instinctively leap to own a security that pays out an annual rate of over 9% – but like any investment – know what you’re buying before you buy.

Taken directly from the U.S. Treasury Department:

“What’s an I bond?

A Series I savings bond is a security that earns interest based on both a fixed rate and a rate that is set twice a year based on inflation. The bond earns interest until it reaches 30 years or you cash it, whichever comes first.

What’s the interest rate on an I bond you buy today?

The fixed rate is locked-in for 30 years and is currently set at 0.00% for new bonds purchased today. The inlfation rate changes every six months in May and October (currently earning interest at an annual rate of 9.62 percent).

This is an important consideration because although the rate is currently very attractive, it is only maintaining it’s purchasing power due to high inflation. Compared to deposit accounts at the bank this is a good alternative. Keep in mind however that there is an opportunity cost for holding I Bonds for the long-term compared to stock investments that may provide better real (inflation-adjusted) returns over longer periods.

Who may own an I Bond?

Individuals: Yes, if you have a Social Security Number and meet any one of these three conditions: 

  • United States citizen, whether you live in the U.S. or abroad 

  • United States resident 

  • Civilian employee of the United States, no matter where you live 

To buy and own an electronic I bond, you must first establish a TreasuryDirect account.

Children Under 18

Yes, if they meet one of the conditions above for individuals.

Information concerning electronic and paper bonds:

  • Electronic bonds in TreasuryDirect. A child may not open a TreasuryDirect account, buy securities in TreasuryDirect, or conduct other transactions in TreasuryDirect. A parent or other adult custodian may open for the child a TreasuryDirect account that is linked to the adult's TreasuryDirect account. The parent or other adult custodian can buy securities and conduct other transactions for the child, and other adults can buy savings bonds for the child as gifts.

  • Paper bonds. Adults can buy bonds in the name of a child.

How can I buy I bonds?

  • Buy them in electronic form at TreasuryDirect.gov

  • Buy them in paper form using your federal income tax refund

What do I bonds cost?

You pay the face value of the bond. For example, you pay $50 for a $50 bond. (The bond increases in value as it earns interest.) 

  • Electronic I bonds come in any amount to the penny for $25 or more. For example, you could buy a $50.23 bond.

  • Paper bonds are sold in five denominations; $50, $100, $200, $500, $1,000

How much in I bonds can I buy for myself?

In a calendar year, you can acquire:

  • up to $10,000 in electronic I bonds in TreasuryDirect

  • up to $5,000 in paper I bonds using your federal income tax refund

Three Points:

  • The limits apply separately, meaning you could acquire up to $15,000 in I bonds in a calendar year

  • Bonds you buy for yourself and bonds you receive as gifts or via transfers count toward the limit. Two exceptions:

  • If a bond is transferred to you due to the death of the original owner, the amount doesn't count toward your limit

  • If you own a paper bond issued before 2008, you can convert it to an electronic bond in your account in TreasuryDirect regardless of the amount of the bond. (The annual limit before 2008 was greater than today's limit of $10,000.)

  • The limits are applied per Social Security Number of the first person named as owner of a bond or, for an entity, per Employer Identification Number

Can I buy I bonds as gifts for others?

Yes.

  • Electronic bonds: You can buy them as gifts for any TreasuryDirect account holder, including children.

  • Paper bonds: You can request bonds in the names of others and then, once the bonds are mailed to you, give the bonds as gifts.

How much in I bonds can I buy as gifts?

The purchase amount of a gift bond counts toward the annual limit of the recipient, not the giver. So, in a calendar year, you can buy up to $10,000 in electronic bonds and up to $5,000 in paper bonds for each person you buy for.”

MAKE SURE YOU UNDERSTAND I BONDS

One very important detail to especially keep in mind is that you need to hold your I bond for at least one year. And if you hold it for less than five years, you lose three months worth of earnings when cashing out.

Maybe the tax benefits and the protection against inflation are appealing to you. But like any investment, make sure I bonds fit well within your overall financial plan.

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The Heat of Summer Reminds Us to Be Flexible

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Your Financial Plan Must Be Adaptable Too – You Don’t Set it and Forget it

As summer heats up, it pays to take a good look at how flexible you are. When you plan for the future, you need to be adaptable. No one knows what tomorrow holds.

This is certainly true in the world of work. In just over a month from now we will celebrate Labor Day. In 1894 President Grover Cleveland signed Labor Day into law as a federal holiday to placate unions, following a bloody and tumultuous strike at the Pullman Co., which made railcars. Today, the break on the first Monday of September is less about labor and more about recreation, cookouts, and the mental end of summer.

To some, labor merely is about a job or the lack thereof. For others, the concept of labor transcends a job. It’s about a career, economic stability for self and family, satisfaction, fulfillment, success, and a sense of mission – a calling. Consider a young person attempting to think about a future of work that may span 50 to 60 years or more. How does one grasp a fast-changing world to formulate a job or career strategy, and an investment strategy to accumulate capital needed to fund their secure future?

Don’t Be Left Behind

Have you ever participated in one of those “future think” company planning sessions? You know, the one that asks where you want the company to be 5, 10, and 15 years from now?

A senior executive of a firm recalled the effort to formulate a five-year plan when he was in top management at a Fortune 500 company. When the plan was completed, the chief executive officer told her team, “If we execute this plan exactly as we have laid it out, in five years we will be out of business.”

Having deflated the egos of those who labored to produce a creative plan, she explained that the world and marketplace in five years would be totally different. If they did not change the plan as they went along, they would be left behind, becoming obsolete and less profitable.

We see examples in the stories of:

  • Microsoft, one of the glowing success stories of the last century, now competing with Apple and Google. Personal computer sales, the historical mainstay of Microsoft, have been eroding for years as users switch to smartphones and tablets. But Microsoft has adapted.

  • Canada’s Research in Motion was a global leader in wireless innovation, having revolutionized the mobile phone industry with the introduction of the BlackBerry in 1999. The company found itself on the ropes as the iPhone became the “must have.” Blackberry users went dark on January 2, 2022.

  • Sears for years was an appliance sales leader with its Kenmore brand. For a myriad of reasons, Home Depot, Lowe’s and a host of other competitors cut into Sears’ profits. In 2018, Sears filed for Chapter 11 bankruptcy protection and as recently as May 2022, announced the closing of about 100 stores. This store-closing-wave leaves about 750 Sears stores remaining – down from approximately 3,500 at its peak.

Remain Flexible

The message? Flexibility counts. Anticipating change counts, with Plan B or even C at the ready. A plan, whether a career plan, a financial plan, or a life transitions plan is a road map. Every road is subject to disruption, detours, potential dead ends and rabbit trails.

Yes, you want a concept of where you will be in one, five, ten years and beyond. But any plan must be dynamic, fluid, and adaptable. You cannot set it and forget it.

Every money manager has a turnover ratio, the average percentange of stocks sold every year. Stock buys may disappoint and underperform. Other stocks may reach a targeted sell point and be sold in favor of a better bargain.

Asset classes may underperform or outperform in the short run and then change direction. Assumptions may appear wrong near term, and turn out to be sound in the long run. Diversification is important, as crystal balls are fallible.

Everyone, whether a breadwinner, a stay-at-home parent, a retiree or an investor, should have a contingency plan to deal with personal setbacks, career reverses and market disruptions because stuff happens. Change is the only constant. Well, death and taxes are also. Have you reviewed your “what if?” plans lately?

Labor Day will signal that the fourth quarter is less than a month away. Have you reviewed next year’s tax strategy? Christmas and holiday promotions will be here before we know it. Have you started planning for next year?

Make your summer …and life plan flexible.

Five Lessons To Remember During Bear Markets

The Stock Market has been trying to teach these lessons forever…

The real value of a bear market may be that it gives investors, who are temporarily frozen within its grip, the opportunity to learn or relearn important lessons regarding risk and diversification.

For savvy investors, a bear market also creates a period for looking beyond emotional headlines and studying the hard facts – facts that can ultimately place them in a position to take advantage of coming opportunities.

Periods of falling equity prices are a natural part of investing in the stock market. Bear markets follow bull markets, and vice versa. They are considered the “ebb and flow” of wealth accumulation.

Staying Calm Can Pay Off

Bear markets create apprehension in the minds of many people. That’s natural. However, any feelings of anxiety should be balanced with reason for anyone seeking financial success.

Anyone dubious about the need for a stable outlook should consider that virtually every bear market was followed by a better than average annual rate of return from the subsequent bull market. 

Five Lessons to Understand

Instead of taking a “time out” from the market, and missing out on potential opportunities, investors should focus on five key lessons the market has repeatedly been trying to teach everyone during its naturally occurring economic cycles:

  1. Periods of falling prices are a common part of investing in the stock market.

  2. An investment’s value will be greatly influenced by fundamental factors, such as profit and revenue growth.

  3. Diversification, while it does not assure against market loss, often provides the safest haven against the ebb and flow of changing markets.

  4. Invest over time, rather than make single lump-sum purchases. In other words, falling stock prices are the friends of dollar cost averaging investors (of course dollar cost averaging cannot guarantee a profit or protect against a loss in a declining market).

  5. Take a long-term view when investing in the stock market. Short-term fluctuations are natural. (The investment price and underlying business often have little to do with each other over the short term.)

Planning Matters

Remember that you’ll be inundated with all kinds of economic information during both bear and bull markets.

There will be reports, for example, about inflation, interest rates, and unemployment figures that may entice you to either give up on the stock market or invest in it to the exclusion of investments paying relatively smaller returns.

To avoid being lured to either extreme, develop a financial strategy that accounts for risks you find comfortable.

Review your investments on a regular basis to help ensure they are still relevant to your overall financial plan, and that you’re staying on track.

Then trust yourself and stick with the plan.