Newsletters - Past Issues

100% safe US bonds 
I-Bonds now yielding 9.6% APR

With the stock market in free fall, and most bonds (IOU’s from businesses and government entities) following suit, investors are looking for alternatives. Cash is safe, but holding cash in an inflationary environment will result in a loss of purchasing power.

But there is an investment that offers both inflation protection and the 100 % safety of U.S. government backing.

A Series I bonds, offered by the U.S. Treasury Department, are currently yielding 9.62%. The interest rate paid on these bonds increases as inflation rises, which is why the yield has skyrocketed.

An I bond earns interest two ways: a fixed rate and a variable rate. The variable rate is adjusted every six months. Note that your rate can also adjust downward or upwards if the underlying interest rates change. The bonds duration is 30 years, but an investor can cash them in at any time after the first 12 months.

In the first six months, you’ll get the prevailing interest rate at that time. Then your bond will adjust to whatever new rate is announced in October and adjust every six months thereafter.

If you need cash and turn in the bond before it’s at least five years old, you’ll pay a penalty of the last three months’ worth of interest, but if you do the math, it’s only a small portion of the total amount.

Interest on the bonds is also exempt from state and local taxes, but you will still have to pay federal taxes on any gains. There are also special tax considerations if you use the proceeds for higher education purposes. 

To buy I bonds, you must be:

• A U.S. citizen, even if you live abroad
• A U.S. resident
• A civilian employee of the U.S. government, regardless of where you live

Trusts and estates can also purchase I bonds in some cases, but corporations, partnerships and other organizations may not.

You need to set up a Treasury Direct account at Treasurydirect.gov., and have a taxpayer identification number (such as a Social Security number), a U.S. address, a checking or savings account, an email address and a web browser that supports 128-bit encryption.

Although children under age 18 cannot set up a TreasuryDirect account, a parent or other adult custodian may open an account for the minor which is then linked to their own.

Once you have an account, TreasuryDirect will email your account number, which you can then log in to your account. Select “BuyDirect” and then “Series I bonds”, then select the bank account to use and the date you’d like to make the purchase.

 The limits per calendar year are:

• $10,000 in electronic I bonds ($20,000 for married couples)
• $5,000 in paper I bonds with your federal income tax refund

You can buy more every year and even set it up to automatically repeat the purchase each year.

You can read more about I bonds or open an account at Treasurydirect.gov.

At the current yield of 9.62%, and the Feds expected to raise rates at least few times in the coming months to curb inflation, an I bond or two might be just the ticket to help combat today’s rising inflation with the added feature of U.S. government backing.

“Watching the markets so you don’t have to”

This is not a recommendation to buy or sell any securities. This article expresses the opinion of Marc Cuniberti and may not reflect the opinions of this news media, its staff, members or underwriters, nor any bank, brokerage firm or RIA and is not meant as investment advice. Mr. Cuniberti holds a degree in Economics with honors, 1979, from SDSU. His phone number is (530)559 -1214.

Greed goblins got you wondering?

Borrowing to invest------ Answered below

Investors often ask me if they should take out a loan, borrow a second mortgage or cash out an annuity or life insurance policy to invest in the stock market.

Since many advisors get paid on money under management and might encourage such a thing, I am of the opinion suggesting new borrowing to invest is unscrupulous behavior on the part of an advisor, with very few exceptions.

Since no one can forecast with any certainty market behavior, having the client take out new loans or cash out an annuity or life policy to invest in stocks may be exposing them to undue risks.

As for the annuity or life policy, one would have to look at the terms and conditions of the contracts. Perhaps in certain cases, cashing out an annuity or life policy might be prudent based on the contract terms, but doing so to put it in the market may not be in the client’s best interest and it could be said, is instead,  in the interest of the advisor. That is because money coming from that liquidation, if put under management with the advisor, might boost the income to that advisor.

As sworn fiduciaries to steward client monies only in the best interest of the client, when I hear about such behavior, I take note of what advisor did it, and catalog that information for future reference. Quite simply, suggesting that a client go in debt to plow it into the market is, in my stern opinion, very bad advice.

The reason for this is that markets can indeed go up, making the debt a generator of profits over and above the original amount of the loan and its interest payments. But markets can also go down. And these ups and downs of the market can go a lot farther and last a lot longer than expected.

Imagine taking out a $100K loan, and investing it, and then the market falls hard and for an extended period of time, such as what we are witnessing now.

Since the legal disclaimer of investing includes the statement “you can lose money, including total loss of principal”, one has to consider the possibility he or she won’t make money, break even, or possibly even lose some or all of it, and subsequently be on the hook to pay back money they no longer have.

Not a pleasant thought.

There are probably some advisors and investors that would argue this thesis, and have encouraged such actions from their clients. I am of the opinion that one should run far and fast from the very suggestion of borrowing to invest and the person or firm who suggested it.

An arguable variation of this would be to decide whether to pay off a mortgage or instead stick it in the market. For reasons I can’t explain, my brain doesn’t so violent regurgitate this idea but I suppose it should. Guess I do have my biases.

I would have to think long and hard about the mortgage question, see what interest rate the client is paying on the mortgage, the term of the mortgage and the financial situation and risk tolerance of the investor and then move forward from there.

Having said all that, there is a situation, at least right now, that I might toss out my recommendation of nixing any loans, and suggesting investors take a look at the U.S. government I-BOND, of which I have written about a few times here in Money Matters.

Link: (https://www.theunion.com/news/business/marc-cuniberti-a-gift-from-the-us-government/)

With 100% principal guarantee and paying 9.6% APR at this moment in time, investors might consider looking at an I-BOND, comparing what it might pay against the borrowing costs to fund it.

In the terms of the I-Bond, interest rates paid can change, an early withdrawal penalty may apply, and there are a some restrictions, all of which should be well known before considering. I suggest using the link above to my previous article to review a brief summary of the I-BOND, then going a step farther and pay a visit Treasurydirect.gov for all the not-so-gory details.

That said, the restrictions versus the opportunities presented by the purchase of the I-BOND along with the government guarantee of principal may make it one of the very few instances where a debt encumbrance to finance an investment might be worth considering. 

“Watching the markets so you don’t have to”

This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, SDSU, and California Insurance License #0L34249.

Turning 65?

Call me (530)559-1214