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Saturday, February 4, 2023

IBonds - Now Paying 6.89% until May 1st, 2023

Why Buy an I Bond?


If you 
1. want to earn a great interest rate
2. in a safe investing environment
3. and protect some of your cash from eroding in buying power due to inflation?

Then you might want to purchase an I bond from Treasury Direct.  

It's disheartening to hear friends of family back off of I bonds because they are just such a strange animal compared to a CD.  They are just as easy to buy as a CD on brokerage platforms like Fidelity or Schwab. 

I only suggest you research strategies that I have tried myself.  I own three I Bonds.  A screenshot of my account is at the bottom of the post. 

But First - What is an I Bond?  


An I Bond is a savings bond that is designed to help you fight inflation.  The rate paid is based on the current inflation environment.  

I Bonds are only available for individuals to purchase through Treasury Direct.  www.treasurydirect.gov 

If it sounds intimidating to open an account with Treasury Direct, please let me reassure you, it is not!  Remember when you were a kid and your parents bought savings bonds for you?   Those bonds are also sold on Treasury Direct.  It's the same organization and designed for all citizens to use.

The hardest (i.e., just plain boring) part about buying your first I Bond will probably be setting up your Treasury Direct account and the funky old keyboard interfact for entering your password.    The steps are 1, 2, 3 on the site starting on the main page "Open an Account" button.

Here's the interface for the password.  You just click the keys that correspond to your password.  Don't let it throw you off!  That part of the site is just a bit more antiquated than the rest. 



How Are I Bond Interest Rates Set?


I bond interest rates are set every six months, May 1 and November 1. If the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U)> for all items, including food and energy, goes up?  So does the I Bond interest rate paid to those who hold a bond.

Why are People Scooping these Up? 


1. Nobody likes how hard it is to predict inflation, or how much it cuts into our buying power.  I bonds are an easy first step to make sure your money grows with inflation.

2. The purchase is commission free.  You can do it from your computer. 
    a)  set up a Treasury Direct account at treasurydirect.gov
    b)  link your bank account to the TD account so you can transfer funds either way

3.  Invest any amount up to $10,000 per person per year.  
    a)  there are ways to invest more, if you have the extra cash.  You can tell your CPA to use your tax refund to purchase I bonds.  You can also gift an extra $10,000 per person per year to your partner in your household. 

4.  The I bond will continue to earn interest for up to thirty years.

Downsides to I Bonds


1.  You've got to hold the Bond for at least one year.  Which can be a good way to make sure that you don't cash it in for a new boat.  (Boats are sink holes for money. Do not do it!)

2.  If you cash in the I bond after one year, you will lose three months of interest.  When interest rates were down around 1% for most fixed instruments and I bonds began paying over 9%?  The three months of interest was no biggie. 

Once you hold the IBond for five years?  No penalty when you cash it in. 

That's about it to the downsides.  As you see below, I have a little bit of money earning a nice rate at least until May 2023.  I can cash out the smaller I bond at any time because it was purchased so long ago. 

Don't be surprised if you don't see your I bond's interest growing at the 6.89% rate.  The I bonds bought that are still under 5 years old will not show the last three months interest in the current value column.  Because you might decide to redeem them, you know, and lose those three months of cash.  

Questions?  Please post them in the comments below.  I gotcha' covered!










Monday, November 14, 2022

How To Evaluate Stocks: Financial Expert Investing ABCs

A client asked me to recommend the best books for learning to pick stocks.  It's a common question, and I wasn't aware of any one-size-fits-all answer.

So I went to the experts during the Money Moves Conference.  It is a new effort by Tulane University professors, public radio stations and local financial institutions to bring money basics to south Louisiana community members.

The speakers included world-class financial experts who boiled down tough topics to the basics.  

Mara Baumgarten Force presented "The ABCs of Successful Money Management."  She is a Professor of Practice, Associate Faculty Director, Master of Finance Program, A.B. Freeman School of Business, Tulane University.  Mara teaches financial management, analysis, and investment courses at the undergraduate and graduate levels. 

Her experience includes managing 150+ trust professionals at JPMorgan serving 13,000 clients with more than $13 billion under management, so she should know about stock picking resources!  

During the Q&A, she responded to the stock-picking resource question with surprisingly simple responses.   

A screenshot of her "recommended resources" slide is here.  The list includes investopedia.com, yahoo.finance.com, TD Ameritrade's YouTube channel, Bloomberg.com and The Fundamentals of Corporate Finance, 10th Edition, by Brealey, Myers & Barcus.  

Mara added these nuggets during the discussion: 

  • Anything that Warren Buffet has written or said, i.e., 
    • "Being greedy when people are scared and being scared when people are greedy." 
    • "Buy stocks in companies you know." 
  • A Random Walk Down Wall Street (book)
  • The Intelligent Investor (book, old style of writing, but classic and good information). 
  • Investor.gov

Reducing Risks with Research 


Mara described two levels of research for evaluating stocks.  It doesn't eliminate all risks though, so she recommended buyers be realistic about the highs and lows of stock portfolios.

Macro Level Basics: 

  • what does the company make? 
  • do people like buying it?
  • is there any other company that makes something similar? 
  • can they grow their business so that having an ownership interest in this company is worth more? 
"You want to find a company that you think will make money, has a good product, that you think will eventually grow," Mara said.   

"Warren Buffet picks companies that he knows where he feels comfortable with his products, like Dairy Queen," she added.  "Also, he lives in Nebraska, and there is a "world's largest" type jewelry store in Nebraska, and he bought it."  Mara pointed out that Buffet buys the things he knows and sees in his life. 

Micro Level example

To illustrate, Mara referenced a colleague's class and how they conducted research focused on an individual company - a children's sippy cup manufacturer. 

"They gathered data, they did forecasting," she said.  For example, to forecast demand they investigated birthrates - what are those going to be?  And what did they think birthrates would be for different levels of socioeconomic spending so they could forecast how much someone might be willing to spend on sippy cups? 

She mentioned how the group even investigated where all the sippy cup component pieces come from which fed the net income analysis for the company.  

 "Then they went to the CEO to present their findings and he said 'that's great!  But let me tell you something.  While you did a wonderful job with your demographic analysis, it doesn't matter how many kids, or the rate of babies being born.  It only matters how many of those are first born, because once the parents have bought the stuff once, they won't buy again." 

Lesson being "reasonable, really smart people, can do a ton of work and still not get to quite the right answer.  And there's no telling that even if they do get to the right answer, the factory doesn't get struck by lightening.  But at least you have a much better shot if you do all the research." 

Also, she reminded us all, "so when you buy mutual funds that holds 500 stocks..... even if your best idea does get struck by lightning, you have (other) best ideas.  You are never going to have a portfolio where everything goes up, always." 

It was affirming to hear someone who has overseen billions of dollars in investments reiterate the basics: 

  • Spread your risk (Mutual funds and ETFs do that for the basic investor)
  • Keep your expectations realistic (stocks go down in value as well as up, lightening can strike in a bad way)
  • Do your research  (low cost and free options are available)
  • Buy what you know and like
  • Warren Buffet is successful.  Invest like Warren.
Personally, I have very few individual stock investments.  One is employee stock purchases from my family's work in the oil industry.  The other is Microsoft.   I use their products daily and read somewhere that Microsoft was undervalued.  I bought a few shares on a whim.  

Ninety-eight percent of my equity holdings are in passively managed index funds that track the S&P 500 index or the total market.    

How do you evaluate stocks?  Do you follow tried and true or maybe take a contrarian approach?  We'd love to know in the comments! 

I'll be posting more wisdom from the conference in the coming weeks, please subscribe to get updates.  (I promise I don't sell the list and certainly don't email unless I have something interesting to share.) 


Friday, November 4, 2022

Treasury Bond and CD Buying - FAQs and Book Recommendations

Interest Rates are Up Again - Time to Lock in Gains! 

Once again, the Federal Reserve is upping the interest rate by .75 basis points.*  It's a golden time for those wanting secure investments that pay a pretty interest rate and the rates may go even higher according to Fed Reserve Chairman Jerome Powell.  

Here is what US Treasuries and CDs are paying at Fidelity.com today, 11/4/2022 at 8:23 a.m up to 5 year maturity.  Not only can you purchase these with money in your after-tax brokerage account there, but you can also purchase via your IRAs or 401K.  






Real-Life Case Example

I have an extra $10K that is coming to maturity in my CD ladder.  (I bought it as a short-term, 6 month CD of $9,000 back in May of 2022.  It has only been accruing .95% interest at the time.  Less than 1%).  



Now is my chance to lock in a longer, better, very secure rate with a CD or a bond.  You can do the same!

CDs offered on this platform at the 2-year mark are paying higher rates than Treasuries.  They are also very safe, as they are F.D.I.C. insured.  I'm planning to pick up a 5% CD next week for the 2-year short term.   It's only a $ 500-a-year return, but I'll take it!  If I had more cash to invest, I would.  

CD ladders have really helped my F.O.M.O. with current CD and bond rates.  I have new money freeing up for investment every few months.  Keep in mind this money has only been earning .05 - 1.5% for a while, so it needs a boost!  

Are you planning to buy a CD or bond soon and have questions? 

Google searches about bond buying today that are most common include these:

  • Buying bonds at a discount
  • Buying bonds on a premium
  • Treasury Direct
I'll dive a bit deeper into each below, but if you are looking for an excellent beginning primer on the subject in audiobook form, check out "Step by Step Bond Investing" by Joseph Hogue, CFA. (paid link) 

I did not receive this book free of charge as a payment to promote! It was my own purchase and I believe it cost only about $6.00.  I was so impressed with the ease of understanding baked into the 1 hour or so it took to listen to the book, that I am hot to recommend it.  

Here are a few highlights from the book:  

Buying bonds (or bills) at a discount

The author, plus info from this Investopedia page about T-bills, gives simple straightforward advice on buying bonds at a discount.  Let's use this Treasury bills purchase as an example: 

    • Let's say you purchase ten Treasury bills for $100 each.  They mature in 52 weeks. The T-bill sales info declares a 5% coupon rate or yield to maturity (YTM) rate.  Because the bills are sold at a discount, you only pay $950 for all of them.  At the end of the 52 weeks, you will receive $1,000 back.  
    • Your yield is the difference between the T-bill's discounted purchase price and the face value due back to you on the maturity date.  
      • Test your knowledge -- what if the YTM was only 3%?  Did you come up with $970 as your discount rate?  It would cost you $970 to buy the bills that would return $1000 52 weeks later

Buying bonds at a premium

Let's use a Treasury Bill as an example.  If a Treasury Bill for sale has a face value of $1000 is paying 7% interest and matures in 10 years when new TBills are only paying 3%?  You will need to pay a premium to get your hands on the bill.  

A simple explanation is available another good reference, this book "Bond Investing for Dummies" by Richard Wild, MBA. (paid link).    "Don't ask why, but bond people quote the price of a bond on a scale of 100.  If a bond is selling at par, or face value, it is typically quoted as selling at 100...If that bond is selling for 105, it's a premium bond, and you need to fork over $1,050."  

I didn't get a free copy of this book to include in this blog post, but I do get a small affiliate commission if you click the link and purchase the book on Amazon.  If you search your local library, you can probably find a copy, that's where I got mine.   It's a good reference book for your personal finance library.  I will probably buy a copy when my library loan runs out of time.  

A Beginner's Look at Investing in Treasury Bonds

1.  Get your Treasury Direct account set up if you don't have it already.  It's very simply explained at treasurydirect.gov  

2. Once you have your treasury direct account set up, it's fairly straightforward to use the platform.  
First, take note of the menu bar across the top of the first page of your account. (see below image, it begins with "My Account" on left and ends with "Gift Box" on right.





3. Click on "BuyDirect" blue tab to purchase your bonds.  

4. Immediately below is the list of products you can buy from that page, starting with "Marketable Securities:  Bills - Short-term securities of 1 year or less" 















5.  I clicked on Bills, just as an example.  And this is the screen that appeared. 

    a. You will see a section of a list...be aware that you can click through to multiple screens.  The first screen starts with the button you see below labeled "4-Week."  If you wanted to see purchase information for 4-week treasury bills, that's the button you would click into. 

 Scroll down on this blog page to see a screen shot of the end of the product list.