Chasing returns 

These are challenging times to be an investor. Making financial decisions on what investments to purchase may include reviewing potential returns.  It’s natural to seek out returns that may increase your portfolio overtime.  A present-day example, such as I bonds, currently yielding over 7% are hard to ignore, should they be considered?

Before answering this question, let’s step back for a minute and look at your larger financial picture.  I believe it’s a good idea to ask yourself several questions before an investment purchase is made.

• What’s the purpose of this investment?
• What job description do these monies serve relative to my other investments?
• How does owning this investment get me closer to what I want?
• What’s the entry and exit strategy and the associated time horizon/holding period to make this investment work for me?

It’s too easy today with all the distractions in our life to simplify investment decisions into a yes/no box.  Our brains are working hard on all sorts of tasks, looking for short cuts and answers when available so we may move on to the next decision.  Our choice matrix about an investment often defaults to expected yields and returns.  Right or wrong, this is how are brains are wired.  “I want more return, this has it, I’ll buy it, next decision please.”

Without giving more thought to the purpose of your investment and being intentional in what you buy, investing may become very reactive.  Holding investments long enough to gain returns before liquidating to cash (paying taxes) and buying other investment/s that may supply greater potential returns.  This is not investing; this is chasing returns.

A better approach to investment choices does exist though it’s counter intuitive.  Instead of charging forward with a purchase, what if you slowed down and thought about what you want first?  How does what you are considering integrate into your other financial and life decisions?  Thinking out loud with a Certified Financial Planner ™ is the foundation of financial planning.  Planning is not a product it’s a process with someone you trust.  Best when repeated annually and anywhere in between so to supply clarity and confidence in your decisions.  Ultimately, this may reduce worry and anxiousness that often arrives when making decisions around money.

Back to the I bonds, digging deeper we discover that there are annual limitations on how much you may purchase.  Cashing them in before five years triggers penalties.  I bonds are long term debt instruments (30 years) issued by the U.S. government with certain guarantees.  Interest is determined and paid twice a year adjusting around current inflation levels.  To convert your return into dollars, one must cash out the bonds and pay federal income taxes on the interest earned.

I bonds are considered an investment, though in a real life three-decade retirement they will have a hard time keeping up with rising costs.  If inflation was high for the next 30 years, I bonds may prove to be a solid investment, not likely though.  Why?  Policy makers, analysts, and the Fed don’t like the impact of prolonged elevated costs on us, the consumer.  They realize when we pay $5 for a gallon of gas and our weekly grocery bill increases by 20% there won’t be a lot left over for us to spend and run the economy.  Sooner than later inflation will be rein in and I bond interest will contract.  Thinking current yields are sustainable for 30 years or even the next decade is unrealistic.

If I bonds are not a great investment, what about their role in supporting an investor’s cash reserves?  This is likely a better job description though due to the lack of liquidity and a five year time horizon your cash may not be available when you need it.  Cash reserves should be liquid and available at a moment’s notice no strings attached.  It’s a return of the cash (not on it) that allows your financial spending plan, what we call financial plumbing system to function properly.  Accessible cash reserves allow the patient long term investor to sit still and avoid reacting in years like 2008, or December 2018, and more recently through the pandemic.

It’s just not necessary to attempt to squeeze yield or return from every investment you own, especially cash reserves.  A financial plan may allow you to hold taxable, inefficient cash reserves while you lean on equities to contract and expand to hedge rising costs.  Studies continue to support the correlation between available cash and an investors behavior.  The more cash available the less likely it is that an investor will reshuffle their portfolio when the sky is dark.

If you like to understand how a financial plan may direct your investments to support what you want, reach out for an introductory chat.

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