Uncle Sam's Bonds:Slow,Steady,Safe

Question of the week:I'd like to diversify my investments (which are now mostly stocks) and am considering savings bonds. Do you think they're hopelessly old-fashioned, or could they actually be useful in my portfolio? --Barb M.

Dear Barb,

Given the roller coast ride the stock market has taken us on lately, I can certainly understand your inclination to duck into something a bit more sure. And you have plenty of company--according to the U.S. Treasury, over 55 million Americans own savings bonds.

When we asked members of the Armchair Millionaire community about why they like savings bonds, we heard a number of responses. This one is typical:

Love those bonds. "I bought some Series I savings bonds a couple of years ago. The things I like about them are safety (no chance of losing principal when interest rates rise, as with a bond fund), no commissions, hedged against inflation, and a decent rate of return (versus cash and bonds, anyway). They won't match stocks for the long run, but seem to be a good place for 'rainy day' cash and as a diversifier." --Jack

As Jack points out, savings bonds offer some very nice features that can really help round out a portfolio. And while I believe that most people investing for the long term should be primarily in stocks (or stock funds), I do think that fixed-income investments (such as bonds) can also have a place in a common sense portfolio, as well. And savings bonds are definitely the easiest bonds to buy. If you decide that savings bonds are right for you, my guide will give you what you need to get started.

The Armchair Millionaire Guide to Savings Bonds

• The basics. When you buy a savings bond, you're making a loan to the government, which promises to pay interest in return. Savings bonds are backed up by the full faith and credit of the United States, making them perhaps the safest investment around.
• Your choices. While there are currently three kinds of bonds available, I recommend only the Series EE and I bonds because they are easy to buy, provide tax advantages and offer nice interest rates.
  • Series EE bonds. These bonds are issued at one-half of their face value (so a $50 bond costs $25), in denominations ranging from $50 to $10,000. The interest rate on EE bonds is adjusted every six months and is currently set at 2.66 percent. This interest accumulates until you redeem the bond, or for up to 30 years.
  • I bonds. These are a lot like EE bonds, except that their interest rate is intended to keep your investment growing ahead of inflation. At the moment, I bonds are paying 4.66 percent interest. Also, I bonds are purchased at full face value (so a $50 bond really does cost $50), in denominations of $50 to $10,000.
• Buying 'em. There are three easy ways to buy Series EE and I bonds:
  • From almost any bank, credit union or savings and loan.
  • Directly from the U.S. Treasury through its EasySaver program at www.easysaver.gov. EasySaver lets you buy savings bonds online and make regular purchases (like monthly) with automatic withdrawals from your bank account.
  • If your employer offers it, through your payroll savings plan.
  Regardless of how you buy your savings bonds, there's never a fee or commission.
• Cashing 'em in. Savings bonds easy to redeem. The only requirement is that you have owned the bond for at least 12 months. (Although if you redeem one before you've owned it for five years, you'll pay a penalty of three month's worth of interest.) Just about any full service bank can redeem them for you.
• The tax advantage. Federal income tax on the interest you earn is deferred until you cash in your bond, or until it stops earning interest. And depending on your income and other circumstances, you may not have to pay federal tax on the bond's interest if it's used to pay for higher education expenses. In addition, the interest on savings bonds is exempt from state and local income taxes.

THE BOTTOM LINE: If you're considering bonds for your portfolio, the convenience and simplicity of savings bonds make them an obvious first choice to get your feet wet.

Comments

[bob]

India is definitely booming BIG!! Look at real estate and indian stock market. Move your money to india !!