Gyroscopic Investing

-I don’t see a point in keeping cash in a checking account at 1%. I buy virtually everything with a Fidelity VISA card that returns 2% on all purchases.

-As you suggest, I bonds with a fixed rate above 0.00% are the only Treasury-issued instruments guaranteed to yield a positive after inflation return. However, some analysts are already predicting that I-bonds will reset to 5-6% when the variable rate is reset on 1 November 2021. Look out for the stampede!

Do you think inflation will drop again? Is that with or without Biden's record $3.5 trillion budget?

MangoMan wrote: ↑Tue Aug 17, 2021 5:12 pmyou will pay 3 months penalty if you cash out before 5 years.

Isn't this (potential) penalty massively outweighed by the huge difference in interest rate?

MangoMan wrote: ↑Tue Aug 17, 2021 8:56 pm

Xan wrote: ↑Tue Aug 17, 2021 6:06 pm

MangoMan wrote: ↑Tue Aug 17, 2021 5:12 pmyou will pay 3 months penalty if you cash out before 5 years.

Isn't this (potential) penalty massively outweighed by the huge difference in interest rate?

For the moment, yes. But there is no guarantee on the rate beyond 6 months, other than the 0.0% fixed portion which you will be stuck with until you sell.

Even if it were to go to zero in some worst-case scenario, isn't 6 months of 3.54% better than a year of 1%?

MangoMan wrote: ↑Tue Aug 17, 2021 3:40 pm

jhogue wrote: ↑Tue Aug 17, 2021 3:14 pm So what do you think would be a better Cash alternative over the long run?

Right now, I'll take T-mobile Money at 1.0% FDIC insured. I have used various high-yield online savings accounts with good results. I do have some I-bonds from years ago with a fixed rate of ~6%. Now those were a good deal!

Just a quick nitpick, Pug...

The fixed rate on I-Bonds never got higher than 3.6% and that was just for a six-month period starting 5/1/2000.

See here:

https://www.treasurydirect.gov/indiv/re ... dterms.htm

If you instead meant composite rate, then, yes, you could well have some bonds that are currently earning 6% or better.

A perfectly respectable position. I would just add that $10K every year can add up.

I have never understood MangoMan’s repeated complaint about the $10,000 cap on annual I-bond purchases.

Can we put that canard to bed once and for all?

There is a $6,000 cap on annual Roth IRA purchases (and also an income limit). Does that mean no one should ever contribute to a Roth IRA? No, it simply means that Roth IRA purchases are best thought of as part of a long-term investment strategy.

The same is true of I-bonds. If you ladder I-bonds as part of a long-term, or “Deep Cash” strategy, over time a declining percentage your I-bonds will be subject to a withdrawal penalty. I-bonds older than 5 years are not subject to any withdrawal penalty (or taxes!) for the next 25 years after that.

I have nothing against short term CDs or high yield checking accounts, but they are, by definition, not long-term solutions to the Cash investor’s long term problems of inflation and taxes.

Xan and MangoMan were talking about using I Bonds as a short term strategy, so the inconvenience factor does indeed weigh heavily.

I agree with you that I Bonds are a great long term repository for cash. The overall interest rate I'm getting on my I Bond stash, built up over the years, is quite pleasing. We have had a large gap between inflation and interest rates for over a decade now, and it doesn't look like that will change anytime soon. Also, for those of us in states with income tax, the tax treatment on I bond interest is an extra boost.

I agree that I-bonds work best as long-term investments. The longer you hold them, the better they get. That’s why they have always been called U.S. savings bonds.

As for your fears about liquidity, I am confident that I can cash my paper I-bonds at my local bank today. I am confident that I can cash my Treasury Direct I-bonds by internet today. In either case, I would have little green pieces of paper in my wallet by tomorrow. If that isn’t liquid, what is?

Liquidity has both a theoretical and a practical side. Practically speaking, I would concede that a stack of paper I-bonds might not be “liquid” in downtown Kabul today. But you could say the same for those little green pieces of paper in your wallet.

Perhaps some reality will help given today's options.

The standard savings account using a quick search appears to be right about .5% (please note the "dot" before the 5%) and we already know the I-bond rate.

I'm simplifying here to keep the math simple (and slightly I-bond favored)...but at the end of a year I get $5 vs. $35.40 between the two per $1K. A difference of 7x, plus favorable tax treatment. (OK you got me, the only thing guaranteed is $2.50 vs. $17.70)

If you buy $1000 worth of I-bonds and need the money quickly (let's say within 48-72 hours) and have to cash them out, then really you only missed out on $5 which was your alternative.

Except for the $$$ buried in your back yard for true emergencies (e.g. cash dollars on hand), I'm not sure why this one is even debatable. The math is what it is. 7x (700%) last time I checked was quite a bit.

Of course if you are a government hater, it appears there's a cost for codling your personal bias. As for me, I'm going for best return because you know I'm greedy that way in all my investment and trading activities.