Tag: Finance

2022 U.S. Dollar Review

Post author By Gene Gard
Post date December 14, 2022

In high demand (Photo: Reynaldo #brigworkz Brigantty | Pexels)

Fish in the ocean probably don’t have a sense that they’re underwater, just as we don’t think much about being surrounded by air all the time here on the surface of earth. Nevertheless, those environments are critical to everyday life for fish and people, even if they are easy to ignore.

Similarly, everything we do economically is tied to the U.S. dollar, and it’s easy to forget how important it is to our daily lives. Americans have to think even less about other currencies than most global citizens because oil and a great deal of international trade is priced in dollars. Nevertheless, the U.S. dollar is not a fixed measure but fluctuates in value frequently — against other currencies, commodities, and anything else priced on a large scale worldwide.

The best-known index of the dollar’s value is the DXY index, which compares the dollar against six other major currencies. According to the DXY index, the dollar has appreciated by about 30 percent over the last ten years and is up 10 percent this year alone. A strong dollar might seem like a good thing, and it does make imported goods cheaper and international vacations more affordable. However, dollar strength can create problems throughout the world, including here in the U.S.

When the dollar rises, exports from the U.S. are less affordable, which hurts U.S. businesses. The price of oil becomes less affordable for the world, as global oil trade is still almost always priced in dollars. This makes goods more expensive even in the U.S., since oil is critical to almost every aspect of production and transportation in global trade. Smaller countries feel even more pain, since they often issue dollar-denominated bonds, which become more expensive to service and ultimately pay off.

Several phenomena can cause dollar strength. The demand for the dollar is uniquely strong, since it is required to settle so many sorts of international payments throughout the world. Also, when geopolitical tension rises, investors tend to buy up dollars and U.S. treasuries as a safer place to park money. But perhaps most importantly, demand for the dollar is driven by interest rate differentials, since currency traders prefer holding currencies that generate the most “carry,” or net interest on investment in the currency.

The Fed has quickly and consistently hiked interest rates in 2022, and the carry created by these rising interest rates means that demand for the dollar went even higher this year. The Fed’s actions pushed USD up almost 20 percent at one point in 2022 alone, which is a startling move for an asset class that is typically much less volatile.

The natural swing of the dollar up and down over time suggests you probably want some exposure to non-dollar assets like international stocks at all times. If the status of the dollar as the reserve currency or treasuries as the reserve asset is meaningfully challenged then non-dollar assets can do some real work in your portfolio.

The dollar was up 20 percent in 2022, but since the peak it has fallen about 10 percent on expectations the Fed will pause or cut rates in the future (reducing the carry). As one consequence of this, the international indexes we follow are dramatically outperforming U.S. markets in Q4 of this year.

Fish may not be able to diversify out of water and we can’t diversify away from air, but we can definitely diversify our investments. As Nobel Laureate Harry Markowitz once said, diversification is the only free lunch, and it’s likely that international exposure could be increasingly important to your secure financial future in the years to come.

Gene Gard CFA, CFP, CFT-I, is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for their next free online seminar on the Events tab at telarrayadvisors.com.

Tags DXY Index, Finance, Memphis, money, US dollar

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Thankful for the Markets

Post author By Gene Gard
Post date November 30, 2022

Capital is magical. (Photo: Picas Joe | Pexels)

As another Thanksgiving has passed, one of the things I’m thankful for is our modern global capital markets. The ability to retire by putting money to work in markets which provide a long-term positive real return is a very recent development on the long scale of humanity. Just as importantly, we can take money out with daily liquidity to fund retirement or other needs — though unfortunately this liquidity also facilitates less constructive activities like market timing and day trading.

As someone involved in the markets daily, it’s easy for me to take all this for granted. I was reminded that not everyone understands the long-term power of markets when I heard this question: “I understand I need to save for the future, but the idea of market volatility is very distressing. What if the market is having a downturn just when I plan to retire and my investments are losing money when I need them in 20 or 30 years?”

If you retire 30 years from now, your positions may be off their all-time highs, but the likelihood of actually being down on diversified positions you buy today is vanishingly unlikely. Despite the best justifications from financial media, usually there’s no particularly good reason for stocks to be up or down a half a percent in a given day. But as the days turn to years and the years turn to decades, stocks have almost always gone up.

In fact, I can’t find a single 30-year period where a broad U.S. stock index has experienced a negative return. Even finding a losing 10-year period is difficult — and after those bad periods usually very attractive returns are soon to follow.

These attractive long-term returns above inflation are really an afterthought of our modern capital markets, not the purpose. Equity markets exist to finance the continued rise of civilization. Money under your mattress is just money, but when invested in the stock market it becomes capital — something truly magical. The returns from the market that allow us to retire are just a by-product of the fact that capital accomplishes something. The inexorable rise of the stock market over time is not reflective of numbers bouncing up and down on a screen; it’s reflective of capital doing its work to continue to build out the greatest civilization the world has ever seen.

There will always be market downturns, corporate missteps, accounting scandals, and Ponzi schemes, but even in a tough year like 2022, we can be thankful for the historical returns in the market. Will the magic continue? As long as productivity growth continues, technology advances, and inflation stays under control, the answer is likely yes.

We may have to measure things in different ways — for example, as demographic trends slow, we might have to measure the strength of the economy by GDP per capita rather than absolute GDP. Nevertheless, we continue to enjoy the best quality of life any generation has ever achieved. Even kings and queens of ages past didn’t have access to things like air conditioning, modern sanitation, immediate access to food from any season, and streaming entertainment. All of these things (financed by capital markets) are truly something to be thankful for.

We are all looking forward to what 2023 might bring, but there’s still a lot to celebrate before we draw the curtain on 2022. Markets have been disappointing this year, but December could still bring good news. Whether or not we see a positive December, you’ll be thankful for consistently investing through down times in the market once the inevitable market recovery ensues. We all benefit from the markets indirectly, but to get the most out of them personally, you have to be invested!

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com.

Tags capital, Finance, Stock Market

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Three Important Tax Concepts

Post author By Gene Gard
Post date November 23, 2022

The modern U.S. income tax began in 1913, and at first it was very simple. Since then, virtually every congress and administration has layered on additional complexity to the point that the tax code is thousands of pages long and no one person can be expected to be competent in every nuance of tax.

As your income and assets grow, tax planning is more and more important. Consulting an expert is almost always a good idea, but here are three general concepts that cover a lot of ground when it comes to working through this complexity via personal tax planning.

Tax advantaged saving

Depending on income, employment status, and employee benefits, there are various tax-advantaged ways to save. Things like 401(k) plans, 403(b) plans, traditional and Roth IRAs, and HSAs are all potentially advantageous from a tax perspective. Generally, they either allow you to exclude money from your taxable income (to save taxes today) or allow you to pay taxes now but let the money grow tax free (so you can save on taxes in the future). Every situation is different, but it is likely in your best interest to max out these types of programs, even if you feel like you have “too much” money locked away in IRAs, or even if you want to retire early. There are many ways to access retirement accounts early, such as the rule of 55, Substantially Equal Periodic Payments, or Roth Conversion Ladders.

Roth Conversions

In traditional IRAs or 401(k)s, the money going in is not taxed but any eventual withdrawals are taxed like ordinary income. With “Roth” accounts, the money going in is fully taxed but then any eventual distributions are generally tax free. There is a way to convert traditional money to Roth at any time — you just have to treat the money converted as though it’s income which is taxed. Usually, it’s best to defer taxes as long as possible, but in some cases it makes sense to take the hit and pay taxes early. If you plot a typical person’s lifetime tax paid, it is U-shaped — income and therefore taxes paid are higher while working, get lower after retirement, and then rise later in life when required minimum distributions create taxable income. It can make sense to do Roth conversions during those low tax years just after retirement when you’re likely in a low tax bracket.

Charitable giving strategies

Most people become more charitably inclined as they age, and understand the tax benefits that giving can bring. There are a number of strategies that can make doing good do even better when it comes to your tax liability. Donor Advised Funds are a way to move money to an account and take the full deduction at the time of the gift. You can never take back the gift, but you can continue to control it in the sense that the money can stay invested and can be donated over time to the charities of your choice. This lets donors take a larger deduction in certain high-tax times, so gifting can be bunched up and then used over multiple years in the future. Later in life, Qualified Charitable Distributions (QCDs) can be made directly from IRAs to charity to meet RMD requirements.

Conclusion

These concepts are only the beginning of a comprehensive tax plan, especially if your income and assets are large. While these ideas are a good start, there’s no substitute for real advice from tax professionals and financial advisors. We all have a responsibility to pay our taxes, but there’s no reason to ignore the opportunities afforded by the tax code when planning for your future — and it’s never too early to begin!

Tags Finance, Memphis, Memphis Flyer, taxes

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Politics and the Marketplace

Post author By Gene Gard
Post date November 16, 2022

Smart investing can stand the test of time. (Photo: Robert Bye | Unsplash)

Last Tuesday’s elections are determining the composition of the U.S. House of Representatives, a third of the Senate (runoffs aside), and 36 governorships. Politically, this feels like a divisive time, and accusations and dire warnings from both sides of the aisle are getting increasingly hyperbolic. How can we confidently invest or stay invested in markets at a time like this?

There was never a time where politics didn’t feel at least a little divisive in America. Recent events have us on high alert, but there are a lot of stories in the history books equally as shocking. In 1856, a Senator was beaten with a cane until he fell unconscious on the floor of the Senate. A few years later, there was an all-out brawl in the House, including more than 30 members. Even as recently as 1988, a Senator was arrested and carried onto the floor feet-first by the Sergeant-at-Arms to comply with quorum rules. The rise of aggressive algorithms on social media probably does contribute to political divisiveness today, and we don’t mean to minimize the recent events and violence in our political process. However, there has never been a period of time where politics have felt completely constructive and settled.

There has never been a period of forward-looking geopolitical security either. Throughout the Cold War and even today, we have the omnipresent threat of nuclear conflict. Events like the Bay of Pigs invasion are largely forgotten today because they were resolved, but there was no guarantee at the time that things would work out at all. All recorded history has been defined by the rise and fall of great powers, and these tectonic shifts in influence and control continue as countries like Russia try to stay relevant and countries like China aspire to become more dominant throughout the world.

We’re not going to solve the world’s problems today, but we can reassure you that despite all the uncertainty in the past, the markets have persevered — through world wars, inflation, recessions, and everything else that happened in the twentieth century. Every time concerning news comes out, people wonder if “this time is different.” Each time is different in its own way, but thus far the world, the economy, and the financial markets have always persevered in the long run.

The good news is that there is no evidence suggesting the political party in power reliably has any influence over the future trajectory of the markets. The conventional wisdom is that populist candidates are negative for the markets and more conservative candidates are market-positive. We think it’s more likely that different ideologies benefit different types of companies (for example, a Democratic sweep might be positive for green-energy companies while Republicans might be good for coal). Also, there are elaborate checks and balances through the legislative process and via the judiciary, so even with a large majority, one party can’t have overly dominant influence.

One theme we always come back to is diversification. At Telarray, we don’t have to spend any time worrying about which stock or sector might outperform based on a particular election outcome because we are broadly diversified across countries, currencies, and investment factors. Our style of investing has exposure to virtually every sector and countless companies throughout the world. Concentrated investing can pay great rewards, but it can also result in great disappointment if things don’t work out the right way. Harry Markowitz’s statement that “diversification is the only free lunch” rings truer today than ever.

Tags Election, Finance, Memphis, Memphis Flyer

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The Best High-Yield Savings Account

Post author By Gene Gard
Post date November 2, 2022

Bond yields are relevant again. (Photo: Acton Crawford | Unsplash)

One silver lining of this current market cycle is the increasing relevance of bond yields. For years, yields have inexorably marched downward, which has resulted in generally favorable total returns for bonds but not a lot of income. Now that bond prices have fallen somewhat, yields are much more attractive than at any time in recent history.

As a consequence, yields on things like CDs and high-yield savings accounts have risen sharply, and the relentless pursuit of the best rates has turned into the equivalent of a grail quest for many investors with cash on the sidelines. To save you time and trouble, I am happy to present the best, most dominant solution for your cash today. You can get two-point-nobody-cares percent by opening an account at your local It Does Not Matter Bank!

I am intentionally being provocative, but I think for good reason. I am an optimizer, and I fully understand that if you have a need to have cash around, it makes sense to get the best possible rate. However, there comes a point where the effort it takes to find the best yield can take away from focus on the big picture or can even be counterproductive. For example, too many credit pulls from new bank accounts could reduce your credit score and make the mortgage you are saving a down payment for much more expensive down the road.

I would go as far as to argue that the pursuit of the highest yields on cash is always irrelevant. If the time horizon is short, the slight delta in yield from one account or money market fund to another won’t matter much at all. If the timeline is long (or undefined), you should think about not being in cash at all and putting your money somewhere with a better chance of not just keeping up but beating inflation in the long run.

There’s one good reason to keep a lot of cash around: You have a definite or likely need to spend money on specific large expenditures soon. There are many reasons to keep a lot of cash around, which in our opinion are not so valid:

• Some people do not like to be invested when the market does not “feel right” (hint: it never feels right).

• Some people want to wait to invest until there is some certainty, but by the time you digest any good news, the market will have already reacted.

• Some people just want the safety and security of cash, but even the highest yielding cash accounts mean that any kind of inflation is going to rapidly erode your savings.

Any amount of time or effort you spend to achieve an extra 0.2 percent per year on cash would almost certainly be better spent focusing on what really matters. Indeed, the real grail quest we should pursue as investors is how to cultivate a meaningful long-term real return, represented by attractive total returns from interest, dividends, and price appreciation after considering inflation. There’s little evidence that any sort of cash or cash equivalent will help you do that in the long run.

Tags bonds, cash, Finance

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Social Security: Choosing When to Claim

Post author By Gene Gard
Post date October 5, 2022

Social Security decisions matter. (Photo: YouVersion | Unsplash)

One of the most difficult decisions around retirement is when you choose to take your Social Security benefits. Deciding when to claim Social Security can make a difference in your monthly bottom line early in retirement and also influence your opportunity for a secure financial future later in life. Here are a few things to consider.

Before You Retire

Your monthly Social Security Benefit amount is calculated based on the number of years you have worked and the taxes you have paid into the Social Security Benefits program. Social Security counts the years you have paid taxes as “credits” for years that you have worked. For example, if you were born in 1929 or afterward, you must have 40 credits to receive Social Security benefits when you retire. This is equal to about 10 years of work.

Your benefit amount is also calculated by the number of credits you have earned during your working years. Fortunately, the Social Security Administration has made verifying your expected benefits easier by setting up an online account. It is worth double-checking your earnings to catch errors and factor in your expected benefits as you strategize for retirement.

What Age Should You Claim?

Several ages should be considered when deciding when to claim Social Security.

• Early Retirement Age: The earliest age you can claim Social Security benefits is 62. However, if you claim Social Security early, you will be penalized for not waiting until the full retirement age via reduced benefits.

• Full Retirement Age: This is the age when you are eligible to receive the full amount of your Social Security benefits. The full retirement age is calculated based on the year you were born. For example, for those born between 1943 and 1954, the full retirement age was 66. If you were born between 1955 and 1960 or beyond, the full retirement age rises to 67.

• Delayed Retirement Age: You can also delay the claim of your retirement benefits until age 70. If you wait until then, you will continue accruing opportunity for higher monthly income when you do retire. However, potential benefits stop increasing at age 70, so there is likely not any good reason to delay the claim of benefits past age 70.

Deciding when to claim Social Security benefits is important as you approach your retirement age. Cases can be made for taking Social Security early, late, or any time in between, but without looking at your comprehensive financial picture it’s hard to use any particular rule of thumb. The interplay between Social Security, Medicare, and other retirement decisions can have a major impact on your financial future, and sometimes you can’t easily undo decisions if you make the wrong choice!

There is a lot of information available online about Social Security, but of course we believe it’s wise to engage an advisor with experience and tools to help you make the right decision for you — and more importantly, be confident in that decision.

Tags Finance, retirement, savings, Social Security

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Investing to Retire

Post author By Gene Gard
Post date September 21, 2022

When I look at the approximate amount of money I think I need to retire, I calculate that I’ll need to save half my take-home income for 60 years so that I can plan for 30 years with the same spending after I stop working. How does anyone manage to save enough to retire?

A: The most obvious good news here is that you don’t have to replace your income. In this highly simplified case, if you are working for a lifetime with a 50 percent savings rate, you only have to replace half your income because you were living on half your salary the whole time! This example is extreme, but even when a typical worker considers things like their 401k contributions, taxes paid, and money spent on commuting and business attire, they realize there’s no need to replace 100 percent of nominal salary in retirement to have the exact same lifestyle as today.

It’s true that if you had to save every dollar you need for retirement before you retire, you would need to work for a very long time. We are very fortunate that today we enjoy the power of capital markets which allows us to buy stocks and bonds to earn meaningful, real returns after inflation. For the last 50 years, U.S. large cap stocks have returned about 10 percent per year, which was a tremendous tailwind to the balance of investment accounts. By staying invested during your working years, your portfolio can grow much more quickly than money in a savings account. In fact, by mid to late career, it’s common to see market gains in a typical year far exceed the magnitude of contributions into retirement accounts.

Note that we didn’t say stocks have yielded 10 percent a year. There’s a strong instinct among investors and particularly retirees to “live on the interest” by spending bond interest and dividend income but never touching the principal in their investments. That probably comes from a time when retirees could buy intermediate term bonds and enjoy 5 percent-plus yields, which is not the case today. Today’s lower yields, rise of stock buybacks, and relatively low capital gains tax rate mean that dividends might actually not be the most desirable way to enjoy retirement returns. Retirees should definitely not be concerned about selling a small portion of the investment portfolio to fund annual expenses.

But how much money do you actually need? Every situation is different, but a general rule of thumb is that you only need to save about 25 times your annual spending in order to retire. A famous paper, known as the Trinity study, suggests that in the first year of retirement a retiree can spend 4 percent of the value of their investment portfolio, then continue spending that same amount indefinitely, adjusted each year for inflation. Markets will go up and down, and spending in retirement will likely rise and fall at different times, but the paper suggests (and our Observatory process confirms) that using this approach means a retiree would have been very unlikely to run out of money during most historical periods with good available data that we can test.

To answer the question directly, people retire by living below their means, investing the extra money in diversified portfolios, and staying invested in a prudent diversified allocation throughout retirement.

Retirement can be an overwhelming subject, so the peace of mind from a well-tested financial plan can be just as important as the details of the plan itself. Rules of thumb are useful but don’t tell the whole story, so at Telarray, we are always excited to use our proprietary Observatory process to help show you what that process might look like for you. You might find that with good practices you won’t need to work nearly as long as you think!

Tags Finance, investment, retirement, savings

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Overconfidence in Investments

Post author By Gene Gard
Post date August 10, 2022

The body of knowledge now called behavioral finance has been developing in earnest since around 1980. The more we learn about the way we interact with money, the more we see that our instincts are often not as useful today as when humans were developing many years ago. Our natural misconceptions are somewhat predictable and fall into identifiable categories. One of the most common biases is overconfidence, which manifests in many ways when it comes to investing.

For example, we will feel most comfortable investing in things we know well, even if it means we’re undiversified. One great example is the tendency to maintain large positions in your employer’s company stock. Geographic home bias is a problem, too, in that we’re more confident in investments in places we know. U.S. home bias has outperformed for the last few years, but then again Japanese investors did great investing locally up until the 1989 crash, too. Thirty-plus years later, the price return of the Nikkei 225 average is still underwater! When AT&T broke up into seven regional companies, investors were found not to invest in the Baby Bell with the best investment prospects but rather almost always in the one they knew locally.

To be provocative, perhaps the most costly form of overconfidence is when investors think they can select individual stocks and outperform the market consistently year after year. Most busy people have a hard time picking up their dry cleaning, so the idea that a working professional with family obligations can have the time to be effective at selecting individual stocks and bonds over the long run is a stretch, at best. What’s worse is that sometimes investors think they are winning, but it’s only because they remember the winners and forget about the losers.

I remember a TV show that did a tour of famous poker player Daniel Negreanu’s house outside Las Vegas. There was a large pool table in the basement, and the host asked him if he’s any good at pool. I remember he looked at her for a long moment and simply replied, “Well, I’m better than you are.” In the same way, with over a decade of daily experience in financial markets, several rigorous financial certifications, and a respected MBA, I suspect I’d be better at picking stocks than an average reader of this article. With that said, you might be surprised to learn that I think you would be foolish to ask me (or any other investment professional) to build a portfolio for you by picking a handful of individual stocks and bonds!

What value can an investment advisor add then? I don’t think an advisor can pick stocks to beat the market, but I do believe there are ways to beat the market in the long run without outguessing the market by picking the right kinds of funds. Aside from curating the investment portfolios, much of the value an advisor can add is behavioral. Talking clients off the ledge when they want to go to all cash almost always has been the right choice historically. Most people like to spend money on things and experiences, and a good advisor can get the signal from the noise and help determine if the time is right for a big purchase. Probably most importantly, advisors can figure out if those approaching retirement are likely to be okay or need to revise their plans.

If we were all like Star Trek’s Mr. Spock, then financial planning would be easy. We’re all fully human though, so you and advisors like me will have to continue to overcome our natural biases and emotions to make the best decisions amid uncertainty on our long-term financial paths.

Tags Finance, investment

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How to Find an Advisor

Cytonn Photography | Unsplash
Financial advice must be unbiased.

One of the most common questions I get is: “I’ve got a windfall/life change/more income. How do I pick a financial advisor to help me figure this out?”

My first impulse of course is to ask if they’re aware that I myself work at a financial planning firm. Joking aside, I never actually ask. I assume they must know, and either think they need to find someone in their local area or are just desperate for unbiased advice. I try to be objective but it’s true I’m biased — I tend to think Telarray is pretty great. So if someone asks and doesn’t express interest in me specifically, I don’t give them a hard sell — I give them my honest opinion.

You want to find a true financial planner. Almost every firm says they’re a financial planning firm but very few really have the tools, expertise, and desire to make a real, useful plan for you. One way to determine if they’re planning or not is how they allocate you to an investment portfolio. Is it just based on age? Is it based on just your feelings about risk tolerance? Is it based on anything at all? In my opinion, true financial planners consider your need, ability, and desire to take risk based on all your expected lifetime expenses. They model scenarios using hard math to actually recommend the portfolio you need rather than accommodating you by agreeing to the portfolio you think you want.

A good investment approach is necessary but not sufficient. I always say investments aren’t the head coach or quarterback — they’re the strength and conditioning coach. I would look for a valid concept with stability over time in an investment approach. Some firms hire a bunch of active managers and periodically kick out the underperforming ones, which seems sensible but is a recipe for overall long-term underperformance (and tax inefficiency!). The more an advisor focuses on their ability to pick winners or respond to short-term market trends, the more skeptical I would be. It’s a marathon, not a sprint.

Figure out how they get paid. If the advisor is paid in any way other than the typical definition of “fee only” then there may be an element of objectivity that is missing. Are they required to be a fiduciary 100 percent of the time? I strongly recommend you research what these two terms mean if you’re not sure. One of the things I value about our firm is that we could put our investors in any investment we deem appropriate with no changes to our income as a firm. We can recommend things like insurance, but since we don’t sell it ourselves, you would know that we only recommend it if you really need it. If you work with someone that is captive to a larger organization that creates their own products, you’ll probably end up with some of those products, and I would always wonder if they just happened to be in your best interest or not.

There are countless other criteria I would consider, but this is just a start. As I mentioned above, everyone is desperate for high-quality, unbiased advice. Nobody can tell the future with certainty, but someone who is highly qualified at real financial planning, has no external agenda, and is incentivized to have your best interests in mind at all times is likely to best lead you down the path to your secure financial future.
Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Tags Finance, Memphis

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U.S. Treasury I Bonds: Not a Panacea

Post author By Gene Gard
Post date May 18, 2022

There is a great instinct to try to distill complex investment matters into simple solutions. For years, online experts insisted that you could get all the benefits of the market by just investing in one index like the S&P 500. Now that the shine of U.S. large cap growth is wearing off, a new reductionist approach is gaining traction — U.S. Treasury Series I Savings Bonds, or “I Bonds.” The siren song is simple — why expose yourself to the ups and downs of the stock market if you can buy a principal-protected investment with a current high yield? How could anyone disagree?

There’s nothing wrong with I Bonds, but there are good reasons why they’re not a substitute for your diversified portfolio — or maybe even your bonds and cash:

• Your rate on these bonds is exactly CPI for Urban Consumers, so technically you only just keep up with inflation. Generally, the purpose of an investment portfolio is to achieve returns in excess of inflation in the long run — these bonds won’t help do that unless you can perfectly time the market. If you could perfectly time the market, you’d probably invest in much more exciting things than I Bonds!

• The interest is taxable, so by buying these currently you’re locking in a slight loss after inflation in real dollars. You’re technically losing purchasing power.

• The current yield is attractive at 9.6 percent, however it will almost certainly not persist this high. The rate resets every six months so really you only get 4.8 percent the first six months and then an unknown rate after that. You have to hold for at least a year and if you redeem before five years you lose three months of interest. I Bonds aren’t even great for an emergency fund due to that one-year lockup, and it’s very likely you will get less than 9.6 percent holding for one year when the second six-month rate (and early withdrawal penalty) is factored in.

• If we all had unlimited time horizons and no short-term cash needs, we probably wouldn’t own any bonds. One of the main reasons to buy bonds is so that if stocks drop significantly, yields are likely to fall and bond prices go up. Since these are floating rate bonds, you don’t get that potential increase in your bond price, which is a reason it’s not a substitute for a traditional bond allocation.

• You can only put $10,000 a year into I Bonds per person, so chasing this high interest rate means you’re only hoping to make hundreds of dollars (not even $1,000) the first year. By the time you can put more money in, yields probably won’t look this good. For investors with larger portfolios, I Bonds won’t make much difference. If $10,000 is most of your portfolio, you’re probably younger and should reconsider going 100 percent bonds to begin with!

There’s nothing wrong with I Bonds, they just aren’t the panacea that some would have you believe. At the end of the day, it’s hard to imagine a long-term scenario where an investor would be better off buying I Bonds rather than adding to a well-planned diversified portfolio. There will always be one-size-fits-all investment ideas, but in the end we believe it’s worth navigating a little complexity to make the best decisions toward a secure financial future.

Tags Finance, I Bonds, U.S. Treasury Series I Savings Bonds