The volatility of the stock market is not for everyone. There are a variety of reasons you may not want to invest in the market, whether you have a low risk-tolerance, are saving for a child’s education and do not want to take on too much risk, or you may be moving into the later phases of retirement savings and can not afford a sizable loss in your portfolio.
No matter what the reason, many people are looking for ways to securely grow their money, while realizing returns beyond the traditional savings account or CD. There are still a few options for investors who may be wary of investing in riskier assets such as the stock market and one of the most popular are the fixed rate savings bonds.
Guaranteed bonds are as safe as an FDIC insured savings account, and usually pay a higher interest rate. Your options in guaranteed bonds include I Bonds, Treasury Bills, and savings bonds. What type of bond you choose will depend largely on your unique financial situation and investment objectives. The online broker ETrade offers the Bond Center which can be an invaluable resource for researching and purchasing fixed rate savings bonds.
The I Bond is one of the most popular types of bonds for investors, as these bonds offer a guaranteed real interest rate that is increased by a twice-a-year inflation adjustment. The I Bond’s nominal return will be greater if inflation is higher, while low inflation will mean lower returns.
I Bonds are an excellent investment if you are looking for a long-term bond strategy, as it eliminates the risk of inflation eating away at your returns, which is one of the major drawbacks in bond investing. If you are looking to add bonds to a retirement fund, or a young child’s college savings plan, the I Bond is an excellent option.
The best fixed rate savings bonds offered by the United States Treasury is the EE savings bond. EE savings bonds are what are referred to as zero coupon bonds, which means that they are sold at less than face value – in the case of EE bonds half of face value. These bonds can be redeemed at full face value when they reach their maturity date.
An advantage to EE bonds is that you can allow your money to compound more efficiently because taxes are deferred until the bond matures. EE bonds are easy to purchase and redeem, and are popular gifts for children and young adults just getting started in investing.
The 90 day Treasury Bill is considered the lowest-risk investment available, and its yield is commonly referred to as the “risk-free rate”. For all intent and purposes, Treasury Bills, or T-Bills are regarded as a no-risk investment and as a result, offer low yields. The upside to owning Treasury Bills is that they are not subject to state taxes.
Bonds work best as a part of a diversified portfolio that is balanced and age-appropriate. If your portfolio is heavy on stocks and other riskier assets, fixed rate savings bonds could balance out the risk, and lend stability to your investment strategy.
Consult with a trained investment specialist at online broker ETrade, or use their portfolio building software to find the right mix of stocks and fixed rate savings bonds for your investment objective.
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