Investing safely in 2022
Many people who have invested in various forms of bond funds have been disappointed to see that, despite receiving regular interest payments, the value of their investment has decreased significantly in 2022. I have received quite a bit of mail from readers asking whether they should bail out of bond funds and instead make new investments in money-market funds, CDs or I bonds.
Here are some considerations you should take into account.
Bond funds: The Federal Reserve has indicated that for the rest of the year, it will raise interest rates several times in order to curb inflation. If you have investments in bond mutual funds or exchangetraded funds with long maturities, it’s likely in the short run that the net asset value (NAV) of your investments will decrease and that, even with regular interest reinvested, the total value of your holdings may decrease in value.
For that reason, I don’t recommend additional new investments in bond funds/ETFs with long maturities at this time.
Investments in short-term bond alternatives will have lower risk and lower yields.
Certificates of deposit: Many readers have asked whether this is a good time to be reinvesting proceeds from maturing CDs and funds from savings accounts with low yields into new CDs. As the Fed increases interest rates, banks and credit unions will likely offer higher rates on CDs. I expect interest rates on CDs to increase gradually, so it would be prudent to invest in shorter-term CDs now; as interest rates increase, you can invest in longer-term CDs.
One of the advantages of investing in CDs as opposed to bond funds now is that, as you redeem your CD at maturity, your principal is safe. There is no guarantee that new investments in bond funds, even in Treasury instruments, will not decrease in value in the short term.
Money market funds: If your main objective is to stay liquid while protecting your capital, you can invest in money market instruments. However, with inflation likely to stay at high levels in the short run, the returns you receive will not keep pace with inflation.
I bonds: As I have written in recent columns, Investing in Series I bonds has a significant advantage now, as well as one disadvantage that I don’t think is significant.
The major advantage is the high rate of return with no capital risk. You can invest in I bonds only through the U.S. Treasury at TreasuryDirect.gov. In April 2022, the interest rate was 7.12%. Starting in May, the interest rate is 9.62% for six months. The combined rate over the next 12 months will be 8.54% for existing I bonds and those bought by April 28, 2022.
After October, there will be a new rate, based on the updated consumer price index. Although the next new six-month rate may be lower than 9.62%, you can be sure that the rate of return will be higher than the return from CDs, or money-market instruments.
The main disadvantage of investing in I bonds is liquidity. Once you purchase an I bond, you can’t sell it for 12 months; if you do sell it in less than five years, you lose three months of interest. Individuals cannot purchase more than $10,000 in one calendar year. Married couples can invest $20,000 per year. In addition, you can invest an additional $5,000 per year with a tax refund.
You cannot lose money on your investment in I bonds. When you compare investing in I bonds to investing in CDs, savings accounts and money market instruments, I bonds stand out as a superior choice for conservative investors (as long as you can accommodate the one-year holding period).
Treasury bills and notes: For short-term investments, you can purchase Treasury bills directly from TreasuryDirect. gov without a brokerage account. You can invest in bills that mature in six or 12 months. The recent rate for six-month bills was almost 1.2%, and the 12-month rate was 1.7%; another option is the two-year Treasury note yielding 2.3%.