The stock market has been extremely turbulent in 2020, sinking into the coronavirus-inspired bear market, but then it shot up to send some stock indices to new record highs. The amount of volatility has thrown even seasoned investors into a loop.
Many are concerned about their ability to survive, which is likely to be a significant recession in the coming months. Furthermore, as the number of COVID-19 cases increases, the prospects for another damaging round of business closings become even more alarming.
Now is not the time to panic, especially if you have stayed the course and have kept your portfolio relatively unchanged throughout the year so far. Now that the stock market benchmarks have rebounded, it is a good time to see if you should rebalance your investments so that risk levels are back in line with your comfort level. If that results in having some money available, there is a smart move you can make that will help protect you against a key risk that every investor faces right now.
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The danger of inflation
Inflation has not been a big concern for investors in decades. You have to go back to the oil price crises of the late 1970s and early 1980s to find a time when US market participants had to seriously worry about inflationary pressures.
However, the extreme measures that central banks and the federal government have gone to in order to promote economic growth have worried some market watchers about the future. With trillions of dollars in stimulus packages so far, and more likely on the way, it’s natural to worry that all of that spending may eventually lead to a loss of confidence in the government’s handling of its fiscal responsibilities.
Those concerns are a big part of why prices for traditional inflation hedges like gold and silver have risen dramatically. Additionally, inflation-protected US Treasury bond securities, also known as TIPS, have become so popular that their real interest rates have decreased negative.
However, there is an alternative that individual Americans have exclusive rights to use. Most people don’t even think of US Savings Bonds as a real investment, but a particular type of savings bond is doing a better job of protecting against inflation than any other option.
Fight inflation with I Bonds
I bonds, short for US Series I Savings Bonds, are designed to protect savers from inflation. Instead of having a set interest rate that you will receive during the period that you have the savings bond, I see that your rates fluctuate every six months.
Currently, I bonds offer a real rate of 0%, which means that they do not pay any fixed interest. The only income they generate comes from the increase in value of their link to the Consumer Price Index (CPI). The I bonds you currently buy have a rate of 1.06%, because the inflation measure used by the I bonds increased 0.53% during the six-month period between September 2019 and March 2020. That rate will apply during the first six months, and then the government will calculate a new rate based on inflationary changes between March and September of this year.
It is true that 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 necessary to keep up with inflation. For example, in the previous six months, bonds paid 2.22% in interest.
Also, the 0% real rate is much better than what institutional investors are doing. Right now, Treasury investors are accepting 0.15% interest on two-year Treasury bills. without inflation protection. TIPS with five-year maturities pay 1.15 percentage points down The inflation rate. Even with longer maturities, the news is not much better, with 10-year TIPS with a -0.91% return and 30-year TIPS with a -0.35% return.
Stock up some cash with bonuses I
The I bonds were not designed as a short-term parking spot for unlimited cash. Investors face an annual limit of $ 10,000 in I bonds per person. You cannot collect an I bond for 12 months, and if you do so within five years, you will lose the interest for three months.
However, by providing investors with an inflation hedge, the bonds have unique characteristics that you won’t find in most investments. With all the uncertainty about the stock market right now, loss protection seems pretty attractive. Take a closer look at I Bonuses if you have money to spare, and you will like what they offer you.
