In a volatile stock market, why do you need to know about I-Bonds?

The stock market has been going crazy. Most people don't want to look at their IRA or 401K. Common sense; wait it out and don't look. Eventually, things will get better. The market swings up and down. We've been through many stock market corrections in the past and will do so in the future. Everything in life is cyclical. I believe Warren Buffet said that he had lost most of his money more than once in the market. But what can you do? This blog post will look at the pros and cons of buying I-Bonds.

A caveat before starting. I am not a financial planner and do not give out financial advice. That being said, you might want to take a look at I-Bonds as a supplement to what you're doing now. Here's a quick primer.

Before we get started, let's define what a bond is. A bond is basically a loan you are giving to someone or something, usually a government entity. It has a fixed face value, the amount you've loaned, and an interest rate that is paid regularly, over a fixed period. Think of it as you own a car and you loan someone money to buy your car. The interest is the reward for you loaning an entity your money. When you purchase a bond you know the amount of principal and interest you will be receiving in the future.

I-Bonds. What are they?

I-Bonds are a government-backed investment designed to hedge against inflation—something we all need right now. Personally, I'd never heard of them until recently. It is almost risk-free money backed by the government. I-Bonds are a specific type of bond issued by the US Treasury Department designed to protect your money from inflation loss. defer

When you purchase an I-Bond you have a fixed interest amount for the first 6 months. The government sets the interest rate every six months, so at the end of the first six months, your rate would re-adjust to whatever the new government rate is. The rate is calculated every six months based on the consumer price index (CPI).

Currently, the rate on I-Bonds is 9.62% for the next six months. That's a pretty good return for a risk-free investment. The government needs money and is willing to pay 9.62% to use your money for the next six months. It will re-adjust that rate for the next six months and so forth.

It sounds too good to be true so here are the pros and cons of buying and holding I-Bonds.

I-Bond Pros	I-Bond Cons
High returns without risk. Currently at 9.62%.	A personal issue, but their website is horrible. It feels like it's some kind of scam. It is not user-friendly. https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm
No risk to principal. If you pay $10,000 for an I-Bond, you will get back $10,000 at the end of the bond period before interest.	Each person is limited to buying $10,000 maximum per year in I-Bonds.
Possible tax benefits. You may defer your interest until the end of the bond period.	I-Bonds must be held for at least one year before being redeemed. They are not liquid if you need cash immediately.
If the Fed raises interest rates again, your new interest rate could be even higher than 9.62%.	If you redeem an I-Bond before 5 years you will lose out on the last three months of your interest. i.e. If you had a $10,000 bond and you were in year 4 and cashed it out early, you would only get $721.50 instead of $962.00 for that year.
You can buy I-Bonds increments from $25 to $10,000 dollars	You are not allowed to buy I-Bonds with your IRA or 401K or other retirement investment and the interest remains taxable.

While I have not bought any I-Bonds yet. I am definitely giving them a hard look as a supplement to my current stocks. I won't go all in, but a little guaranteed return might be worth investing some money in.