What does inflation mean for your investments and WTH are I-Bonds???

by | May 19, 2022

Inflation can sound super scary and news channels are ringing the alarm bells for the recent increase in inflation rates. Inflation is represented as the rate at which prices for goods and services are rising which means your dollars won’t buy as much as it has in the past. You probably have noticed this most by the price of your groceries and gas. Here is what you need to know about how you can minimize its effects on your financial plan. 

What to do about inflation?

There are generally two different goals when it comes to protecting your portfolio against inflation. The first is you want to outpace it, meaning you want your investments to provide a return greater than the rate of inflation. For example, if your investment portfolio returns 7% but inflation is at 5% then your rate of return is essentially only 2%. Increasing the amount of potential earnings in your portfolio will naturally also increase the risk you expose your investments to so this is a balancing act that your financial advisor can help you with. 

The other goal is to hedge against inflation. This means you are just trying to maintain the value of your dollar so you will invest it in securities that have a consistent return that at least matches inflation. One way to do this is through Treasury Inflation-Protected Securities (TIPS), which if we work together and I manage your investments comprise 30% of your Bond portfolio. They are issued to help investors receive an interest rate that adjusts to keep pace with inflation. These are guaranteed by the U.S. Treasury Department and some of these bonds can even be exempt from state and local income taxes!

WTH are I-Bonds?

Another option you may have been hearing quite a bit about are I-bonds. I-Bonds are issued by the U.S. Treasury Department and backed by the government. These investments will generally offer an interest rate that matches inflation. The interest rate changes every 6 months so buying an I-bond before October 2022 for example would produce an interest rate of 9.62%. After 6 months, the interest rate you have will change and be based on the new rate announced. The benefit of an I-bond is that they will generally keep up with inflation but also have a fixed interest rate of 0%, so they are a very safe investment. These are great options for investors that are trying to preserve their cash value in a relatively safe vehicle.

So what is the catch with I-Bonds? First, you can only invest up to $10k a year per investor and your cash is locked into this investment for 1 full year. That means if there is any chance you would need access to that cash in a year, this would not be a good investment option for you. If you withdraw your cash after 1 year but before 5 years, you forfeit the last 3 months of interest your investment earned before the withdrawal. After 5 years, there is no penalty. Check out this article here to get more details and examples of how these I-Bonds can be used! 

So what are the other steps to take to protect your financial plan from inflation?

  • Invest in a diversified portfolio including stocks and bonds that reflect your personal goals, situation, and risk tolerance
  • Keep your investing costs low
  • Avoid making decisions about your finances based on media, friends, or family that are basing their advice on fear

If you are concerned about how inflation will affect your financial plan and want help mitigating the risk it does impose, let’s chat to discuss your concerns. My door is always open :-).