ARE MUNICIPAL BONDS A GOOD INVESTMENT?
Bonds by definition are fixed-rate instruments issued by various bodies. There are corporate, government, and municipal bonds and they all have a set interest rate, and a specific maturity (generally 1-30 years), and are backed by corporations, the US government, or a specific municipality. The US bonds are the safest and they all have ratings depending on the financial strength of the issuer.
The appeal of municipal bonds is that their interest payments are generally federal tax-free and if they are issued from the state in which you live, they may also be state income tax-free. Many wealthy investors own “munis” as a way to generate income without having to pay any taxes on the interest.
The catch is you generally need to get a longer-term bond (20-30 Years) in order to get an interest rate high enough to make it worth your while. In an environment where interest rates are increasing, the current values tend to decline at a rate faster than the interest being paid. If you have more money than you will likely ever spend, you’re willing to take some interest rate risk, and you can put money away for 20 years, they may work for you. If not, there are better places to put money to generate income. Like everything we discuss in these market letters, know all of the risks before investing and educate yourself as much as you can. If you would like to continue receiving these market updates, make sure to go to www.gaadvisorygroup.com and signup for our newsletters and YouTube videos.
IBONDS—ARE THEY TOO GOOD TO BE TRUE
If you haven’t heard of I bonds, you might be missing out on one of the best places to park safe money. These inflation-protected savings bonds are currently paying 9.62% annually—and are 100% guaranteed by the federal government. The interest rate on these bonds is high because it’s set by the prevailing inflation rate (hence, the “I” in I bonds.
This is one catch. There’s a limit to how much you can buy in a given calendar year ($10,000 per individual), and you can’t redeem these bonds for at least a year after purchase. What’s more, if you withdraw funds within the first 5 years, there’s a 3-month interest penalty.
While $10,000 isn’t a large amount, it’s still very good for small investors or someone that wants to put away a little money each year. The other side of the coin is if the inflation rate starts coming down, that should be good news for your stock investments.
We always like to bring helpful information to our readers and we know many people who have gone through the I bond website to pick up $10k worth but bear in mind that while many stocks are getting hammered this year, the S&P 500 has beaten the bond market by an average of 3.5x over the past 93 years.
Now if you’re looking for a short-term hedge against inflation, by all means, check out I Bonds, but don’t give up on stocks as they are the true wealth builder in the long term. If you would like to continue receiving these market updates, make sure to signup for our newsletters and YouTube videos.