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Series I Savings Bonds Beat Stock Market Over Last 7.5 years

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The Savings Bond Advisor has a very interesting chart comparing the Vanguard 500 Index Fund with Series I Savings Bonds. The chart compares the difference between investing the same amount each month in I Bonds and the index fund. The comparison begins when the I Bonds were introduced in 1998. The I Bond is the clear winner for the last several years. Also, it's important to note if you had to take the money out between 2001 and 2003, you would have lost money from the index fund.

It should be noted that the index fund is coming back and is getting close to the I Bond value. It should also be pointed out that 2000 to 2002 were the worst years for stocks since the 1970's. But if you're looking for a risk-free investment that's guaranteed to stay above inflation, I Bonds should be considered for at least some of your portfolio.

If you're ready to buy I Bonds for the long term, you may want to wait until May. The current fixed rate is only 1%. This gets added to the inflation rate to create the total I Bond rate. Every six months the inflation component changes. The fixed rate stays the same. For long term investors, the fixed rate is the most important number. At 1%, the fixed rate is the lowest it has ever been since the I Bonds were introduced in 1998.

I'm predicting the I Bond fixed rate will increase to around 2% in May (see post). The Savings Bond Advisor is predicting that the Treasury "might go a bit higher than 2%" based on current five-year TIPS and the Treasury's history. However, we were both wrong last November when the Treasury lowered the fixed rate from 1.2% to 1.0%. It appears the Treasury was compensating for the very high inflation component that resulted from the spike in gas prices last year (there's no need to have a high fixed rate component when the inflation component is very high.) The inflation component will now be very low for the next cycle starting in May so hopefully, the Treasury will compensate the other way. The inflation component will be known before May 1st on April 19th when the CPI-U numbers for March are released.

Refer to the Treasury I Bond website for more info on I Bonds.
Comments
Deymond
Deymond (anonymous)   |     |   Comment #1
I'm not suggesting the I-bond isn't a good investment, but it's very easy to chart two investments and alter the time frame to make one look worse than the other.

To suggest that 'the I Bond is the clear winner for the last several years' implies that the I Bond has been beating the S&P consistently. If you break up the chart into large segments, the I Bond only beats the S&P from 2000 to 2003.
Banking Guy
Banking Guy (anonymous)   |     |   Comment #2
You're right that the I Bond is ahead due to the stock market years from 2000 to 2003. The S&P is still down about 15% from its 2000 peak. I wouldn't be surprised if the S&P takes the lead in this comparison (starting from the start of the I Bond) sometime this year.