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I bonds and TIPS Compared - YouTube
Channel: Healthy, Wealthy, and Wise
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eye bonds or Tipsy TF
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I've invested in both as an inflation
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hedge and in this video I'm going to
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share with you which one I prefer
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investing in myself right now and I'll
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talk through my reasons behind that
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choice
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because everyone has their own unique
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situations then because Economic Times
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change I'll go over the pros and cons of
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both tips and eye bonds to help you best
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decide which option may be the best
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investment choice for you whether that's
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now or in the future
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and finally I'll also tell you what I'll
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be looking at and planning to do once
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inflation gets under control
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if you're looking for a video on eye
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bonds and tips compared this video is
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for you
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but real quick I want to First welcome
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you to healthy wealthy and wise we're
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talking about our financial wellness and
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how to achieve it is my top priority
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my name is Kevin and on this channel I
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share my experiences and the strategies
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I've used in my over 25 years of DIY
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investing
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I want to welcome back everyone in the
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community that keeps me motivated to
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make these videos and for anyone new
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here if learning about easy everyday
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things you can do to improve your
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financial health is something you're
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interested in
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we'll consider this your formal
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invitation to join the community
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and all you have to do is press the
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Subscribe button and turn that
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notification Bell on it's totally free
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and it'll make sure you don't miss any
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videos as soon as they come out
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okay on to inflation this word has been
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on the top of everyone's Minds whether
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it's in the everyday world or the
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investing world
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in our everyday lives we're seeing
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everything costing a lot more gas prices
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groceries everything at the highest
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rates in 40 years
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and for investors that inflation has led
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the Federal Reserve to start trying to
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Tamp it down by raising interest rates
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and when interest rates go up stock
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prices tend to go down and if you're an
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investor in the stock market you've seen
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quite a hit to your portfolios and I'm
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right there with you
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so knowing all this you've been doing
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your research and trying to figure out
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how best to invest in a period of high
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inflation which is probably how you
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found this video
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and most likely in your research you
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keep coming across two popular options
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series eye savings bonds or just I bonds
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and then also treasury inflation
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protected securities more commonly
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referred to as tips
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now in the past I've made and released
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comprehensive videos on both types of
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Investments which were meant to give you
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a good understanding of what each of
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them are and how they work and if you're
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still learning about tips and eye bonds
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and haven't seen those videos yet I'll
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link them in the description for you
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I would really recommend watching them
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if you're seriously consider investing
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in either tips or eye bonds
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now this video is different because
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today I'm going to compare and share my
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own personal experiences with high bonds
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and tips by explaining the pros and cons
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of each the reasons I invested in them
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at the time I invested in them and then
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finally tell you which one I prefer
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investing in today and why
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so early last year it was obvious to me
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that inflation was right around the
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corner after everything was returning
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back to normal yet the Fed was still not
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raising interest rates
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as someone that had never had to invest
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within a high inflation environment but
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was anticipating that time coming I
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started to look at my options and found
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I bonds and tips probably just like you
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now I had never been a bond investor at
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the time so I began learning all I could
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on both eye bonds and tips and
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ultimately I made my decision to invest
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in tips
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the reason I invested in tips first was
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not because of the fundamental
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differences of how tips and eye bonds
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Works where tips keeps a fixed interest
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rate with a principal that is adjusted
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with the rate of inflation whereas with
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I bonds the actual rate itself is what
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is adjusted
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again if you don't understand this
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fundamental difference definitely check
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out the videos Linked In the description
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as they will make this more clear for
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you
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anyway as I was saying that difference
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in how they adjust to inflation was not
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the reason I chose tips
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I chose tips because of three other
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reasons the first being the biggest
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reason for me which was convenience
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unlike eye bonds where you have to
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invest in them directly with the US
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Treasury you can invest in tip spawns
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through a tips ETF using any of your
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current investment Brokers or trading
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platforms
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now you can also buy your own tip spots
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directly through the U.S treasury as
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well but the convenience of buying a
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fund of tips with my current investment
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account where I could easily buy and
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sell shares just like I do with any of
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my stock ETFs I've invested in was very
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attractive to me and the main reason I
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initially chose to tip CTF over I bonds
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or even Standalone tips
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the second reason that I went with a
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tips ETF was for liquidity meaning you
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could literally buy shares one day and
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then sell them the next day with no
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penalty
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even if you bought your own tip spawns
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directly through the treasury you could
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also sell it before maturity on the
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secondary Market without penalty but
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it's just not as easy as with an ETF
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now with I bonds it's a whole different
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story
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first of all there is no secondary
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market for I bonds meaning you have to
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buy and sell them directly through the
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U.S treasury
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and once you buy them you can't cash
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them in for at least 12 months there's
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just no way around it
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so if you were to need that money
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anytime within the next year you'd be
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out of luck because you won't be able to
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access it until a full year has passed
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because of this liquidity issue an i
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bond is not where you would want to put
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your emergency funds or money you may
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need within the next 12 months
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now after a year passes you can sell it
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anytime afterwards but another
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consideration is if you cash it in
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before holding it for less than five
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years there is a penalty where you would
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have to Forfeit the last three months of
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Interest
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now after five years that penalty goes
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away but you can see how that's quite a
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long time where inflation could have
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subsided well before you would be able
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to sell the I Bond penalty free
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and then finally the last reason I went
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with a tip CTF over an eye bond was the
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annual limits with an i Bond you're
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limited to buying up to ten thousand
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dollars worth of eye bonds for yourself
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that limit does not apply to tip ctfs
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now if you're married your spouse could
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buy their own eye bond and you could buy
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I bonds for others as gifts but for
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yourself per person per year you're
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limited to ten thousand dollars now
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that's not an insignificant amount of
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money but if you're someone that has a
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fairly substantial amount of savings
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this just means that I bonds won't be
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able to fully hedge your invested
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Capital against inflation
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so let's say you have an Investment
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Portfolio of five hundred thousand
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dollars you can only utilize I bonds to
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hedge two percent of your portfolio
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against inflation
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now that doesn't mean you can't or
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shouldn't consider I bonds it's just
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that if you have a higher net worth they
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would only serve as a small part of your
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inflation hedging strategy
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all right so at this point you're seeing
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the pros of a tip CTF over the cons of I
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bonds and probably are understanding why
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I first went with the tip CTF
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but as I shared I have bought an eye
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bond as well
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so let me now explain how I came to
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investing in an eye bond which is where
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you'll see the big potential advantage
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of an eye bond over a tip CTF
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so as I mentioned I bought into a tips
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ETF early last year and I've held it
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close to a year and a half now where
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I've had five quarterly dividend payouts
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to me
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the dividends over this period of time
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have provided me an annualized return of
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5.3 percent which isn't bad right
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especially after seeing the big negative
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Returns on the stock market year to date
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and remembering that the inflation rate
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when I first bought into the Tipsy TF
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wasn't as white hot as it's been the
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last few months
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but here's the problem with the tips ETF
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in buying it now
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being that it's on the secondary Market
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you're buying shares of a fund that are
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constantly at the whim of traders who
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are pricing in not only the underlying
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values of the tips the fund holds but
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also how they see inflation trending in
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the future
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so while we've seen high levels of
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inflation this spring into the summer we
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also know that the FED is actively and
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aggressively hiking rates and we expect
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that to begin to lower the rate of
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inflation in the near term
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because of this the value of each Tipsy
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TF share has since gone below the price
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I bought it at because Traders are
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always speculating or looking into the
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future
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when I do the math over the period of me
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owning The Tipsy TF with the dividends
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earned minus the non-realized capital
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loss I'm currently ahead by only about
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1.5 percent
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that's not great but again better than
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the stock market has been doing recently
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with the clients around 20 percent and
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still better than any basic savings or
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money market accounts now in a minute
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I'm going to tell you what I think will
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happen with my tip CTF in the near term
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but first let's get back to I bonds and
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what I consider to be the big advantage
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of buying them at least right now
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and that is depending on when you buy an
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i Bond you can know not speculate but
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100 know your actual guaranteed rate of
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return for at least the next six months
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and if you buy it in one of two specific
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months of any year you can know your
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rate for the next 12 months which would
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completely cover the mandatory time you
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have to own the bond before you're
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eligible to redeem it I'll tell you that
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trick in a second because that's what I
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did for myself
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for just a very quick background the
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adjustable inflation rate component of
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an i bond is updated every six months
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based on changes in the CPI or Consumer
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Price Index
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this update to the inflation rate occurs
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two times per year on the first business
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day of May and on the first business day
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of November
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again my ibond explained video can give
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you more details on how this works but
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for the purpose of this video what you
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need to know is that any I Bond bought
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today through the end of October 2022
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will pay interest at 9.62 for six months
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from the month you bought it as I said
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you have to hold it at least 12 months
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so let's take the completely
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hypothetical worst case scenario where
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all the feds tightening Works quickly
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and the inflation rate drops to zero
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percent or even if it goes negative
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where deflation occurs
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even if that were to happen you still
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would have that minimum of 4.81 return
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for the next 12 months which would still
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be better than any interest-bearing Bank
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savings account and better than what my
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tip CTF has done since I've owned it
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although just always keep in mind that
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comparing past performance to Future
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performance is not an Apples to Apples
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comparison
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to that point I bonds weren't paying
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anywhere near this rate last year when I
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first bought into the tip CTF
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now for the trick
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okay maybe trick isn't the right word
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but a strategy to know what your I
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Bond's interest rate will be for 12
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months instead of just six months so in
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April and October the months before the
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updated CPI adjustments take effect the
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updated CPI numbers are released by the
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labor department that will let you know
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what the upcoming rate adjustments will
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be
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and you don't have to figure it out
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those numbers will be reported by any
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reputable news source
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so what this means is if you buy the I
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bond in April or October you will get
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the current rate for six months and then
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the new rate will take effect for the
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next six months after that allowing you
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to know your rate for an entire year
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this can be a little confusing to
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understand so if you're unsure you can
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check out my I bonds video or go to
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treasury direct.gov for more details
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so anyway here's what I did in April I
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saw the rate was jumping to 9.62
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starting in May and that definitely
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caught my attention
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as of April the current rate was 7.12
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percent
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so I bought the I bond in April knowing
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that I would get 7.12 for the next six
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months which would then go up to the
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updated 9.62 for the following six
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months
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that left me knowing that I would be
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guaranteed a return of 8.54 for the
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entire 12 months I'm required to own the
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bond before I could sell it and that's
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guaranteed something a tips ETF can't
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provide
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so what does all this mean now and for
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the future
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first of all for right now with the
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current rates being what they are I
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strongly prefer investing in an i Bond
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over the Tipsy TF
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all of the positives that I shared from
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the tip ttf over the I bonds don't
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overcome the relatively High guaranteed
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rate of return of the I bonds at the
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currently set I Bond rates looking ahead
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here's some thoughts to consider
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first of all I don't claim to be able to
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see the future so take this for what
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it's worth but what I see happening is
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the federal reserve's moves will begin
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to reduce the rate of inflation there's
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evidence that's already starting to
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happen therefore the next CPI adjustment
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to the I bond rate is very likely to be
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lower
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we'll see what it actually is in October
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whether you buy an eye bond now or in
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October you will still be guaranteed six
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months of 9.62 before the new rate kicks
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in
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the benefit of waiting until October is
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you'll know what the following six month
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rate will look like allowing you to know
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your 12-month return
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of course by waiting that means your
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12-month requirement of holding the I
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bonds is delayed until after you buy it
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the fact you can't sell your money for
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that period of time is the big downside
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for I bonds and as I mentioned earlier
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one of the reasons I opted against
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buying them at first
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initially one of my concerns was the
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penalty of redeeming the I bomb before
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five years
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however if this come to the conclusion
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that once the I Bond's earning rates
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start to drop as inflation drops I'll
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consider selling the I Bond after three
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months once a lower rate take effects
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which would minimize the penalty for
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Redeeming the I bond for holding it
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under five years
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and I don't expect to hold the bond that
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long because I do think inflation Will
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Be Tamed to the point where I'll then
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want to take that money invested
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elsewhere
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but if I'm wrong and inflation rates
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remain high I'll just keep holding the I
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Bond and considering buying more up to
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the annual limits each year until
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inflation subsides
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as for the Tipsy TF in the short term
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I'd probably predict that the dividends
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in my tip CTF will continue to increase
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because the underlying tips bonds that
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the fund owns will continue to be
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adjusted up due to the current high
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levels of inflation
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but the value of the ETF shares will
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most likely continue to decline as
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Traders speculate future declines in the
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rate of inflation due to the fed's
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tightening
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ultimately the issue with a tips ETF is
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that you have to consider the
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speculative nature of the holding and
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realize that it adds additional risk
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looking back I thought I was ahead of
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the game by investing in the Tipsy TF
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when I did but really I needed to invest
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a little earlier than I did lesson
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learned
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so when I consider all of these factors
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for myself the I bond is where I would
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invest today
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but timing is important when you
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consider buying either an eye bond or a
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tip CTF
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down the road as economic Times change
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in the future I'll look to buy Tipsy TF
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shares when I think inflation will be
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coming not when it's already here
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and on the flip side I'll only buy ibots
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once the inflation is already happening
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and the higher rate is set
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so that's what I've done and my thoughts
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on these two popular inflation Hedges
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how about you what do you think
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today are you buying into a tips ETF or
[892]
are you buying I bonds let us know in
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the comments
[895]
I hope you enjoyed the video and if you
[897]
did please press that like button and
[898]
share with your friends and on any of
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your social media sites and forums
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you're on to help spread the information
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and again if you're new to the channel
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or just an occasional visitor we'd love
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to have you join the community you just
[909]
gotta push that subscribe button we'd
[911]
love to have you on board
[912]
until next time thank you for watching
[915]
and have a great day
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