- I bonds are a wise investment choice when inflation is high.
- When inflation levels are more moderate, you may want to look at other investment options.
The quick answer? Not necessarily.
If you've been following the stock market this year, you're no doubt aware it's been extremely volatile. And we could be in for many more months of wild swings.
If you're looking for a more stable investment to help offset some of the losses you keep seeing in your brokerage account, then it might be a good idea to consider putting money into I bonds. I bonds are generally a low-risk investment that has the potential to pay you generously. But while I bonds are a good bet right now, they're not always an ideal investment.
Why I bonds make sense right now
I bonds are government-backed securities whose interest rate is tied directly to the rate of inflation. Now, you're probably aware that inflation is soaring right now, as evidenced by your much higher supermarket and utility bills, among others. That's a bad thing from a cash flow perspective.
But from an investing standpoint, high levels of inflation make I bonds a more lucrative option. Since inflation is high these days, I bonds are paying more interest. So loading up on them is a good choice for many people right now.
But during periods of low inflation, I bonds aren't such a solid choice. While they're still a relatively low-risk investment, you can end up with a very limited return on I bonds if you buy them when the rate of inflation is down. In that scenario, if you're looking for a safer investment than stocks, you may be better off putting money into corporate bonds (which are bonds issued by companies) or municipal bonds (which are bonds issued by states, cities, and other localities).
Don't just stick to I bonds
You may be inclined to develop an investing strategy that revolves around I bonds. But doing so could mean limiting yourself to a lower return and not seeing the growth you want out of your investments.
Plus, you're only allowed to purchase $10,000 worth of I bonds on a yearly basis. If you only have $2,000 a year to invest, that's not a problem. But if you're able to invest more than $10,000, that limit could trip you up.
All told, I bonds are, at times, a wise investment. But when inflation levels are low, they're not the best bet. And either way, it's a good idea to have a mix of investments in your portfolio. That mix might consist of different types of bonds as well as stocks, which tend to deliver higher returns than bonds on a whole.
You should also know that I bonds come with certain restrictions. When you buy stocks, you can sell your shares at any point. However, you're required to hold I bonds for at least 12 months after buying them. And you'll be penalized by losing some interest on your I bonds if you cash them out before holding them for five years. That lack of flexibility is another reason why you can't just stick to I bonds in your portfolio and may want to look at other investments, too.
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