The recent troubles in the financial markets have many looking for ways to invest without taking a great deal of risk. Cash products, like savings accounts, can be one way to save, but many savvy investors understand that these accounts do not offer high enough returns to offset the eroding power of inflation. One solution is to invest in securities that are guaranteed to keep pace with inflation. A way to do this with a minimum amount of risk is to consider investing in I bonds from the U.S. Treasury.
What Are I Bonds?
Any bond is, in effect, a loan you make to another entity. In the case of I bonds, you are making a loan to the U.S. government. The government promises that you will get your principal back, with interest. For many bonds, the rate of interest is fixed when you invest; it may or may not keep pace with inflation. I bonds are different though. Every six months, the interest you are earning is adjusted upward, keeping pace with inflation. This means that the real value of your capital remains steady.
While you are unlikely to earn a spectacular return with I bonds, it can be a way to preserve your capital without a great deal of risk. The U.S. government offers bonds that many consider essentially risk free. While there is the possibility that the government will default on its loans, most investors consider this an extremely unlikely scenario. Indeed, if the U.S. government stops paying on its bonds, there is a good chance that everyon is facing bigger problems than losing money in I bonds.
How to Buy I Bonds
You can purchase I bonds directly from the government by going to TreasuryDirect.gov. You can set up an electronic account, and begin investing quite quickly. You must be 18, though, and have a valid Social Security Number. If you purchase your I bonds electronically, you can start buying bonds at the $25 level, and get bonds in any amount, to the penny, beyond that. If you insist on paper I bonds, you must start at $50, and you can only purchase them in denominations of $50, $75, $100, $200, $500, $1,000 and $5,000. It is also possible to use your electronic account to convert Series E and Series EE bonds, as well as paper I bonds, to electronic securities through TreasuryDirect.
There is a penalty for redeeming I bonds within five years of purchase. You will still get your principal back, but you will forfeit the most recent three months of interest. However, after five years, you can redeem your I bonds at any time without penalty.
For those who are looking for something of a safety net, or for those who are interested in devoting a portion of an investment portfolio to capital preservation, I bonds can be useful. They protect your money against inflation, and provide a low-risk investment. However, it is important to consider diversity, and limit the portion of your portfolio invested in bonds, since I bonds will not promote the kind of growth you need if you are trying to build up a large retirement nest egg.