I Bond Golden Egg and Asset Allocation

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2a704d4b
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I Bond Golden Egg and Asset Allocation

Post by 2a704d4b » Wed Mar 07, 2018 9:26 am

I have been tremendously lucky and have been gifted a golden egg of an I Bond: a fall 2000 bond of 10,000 currently valued at 27,000

On the one hand, I see no reason to sell this rock solid investment and am happy for it to keep on generating 6% interest per year til 2030.

On the other hand, the presence of this bond does throw of my desired asset allocation from 80/20 (S/B) to more like 55/45 - 60/40.

Any advice on how to handle that? Additionally, would it be advisable to not invest in any more bonds/fixed assets as my quota is more than met, or if I view this I bond as a long term holding would it still be advisable to keep some new investment in bonds which could have a shorter liquidation timeframe? I don't necessarily have any big purchases on the horizon.

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midareff
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Re: I Bond Golden Egg and Asset Allocation

Post by midareff » Wed Mar 07, 2018 9:30 am

I'd lock it up and forget about it until maturity. 6% is probably as good or better than we have reason to expect (especially risk free) on a balanced investment portfolio forward a decade, maybe two. Just wait until the baby hatches and be thankful.

dbr
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Re: I Bond Golden Egg and Asset Allocation

Post by dbr » Wed Mar 07, 2018 9:36 am

2a704d4b wrote:
Wed Mar 07, 2018 9:26 am


Any advice on how to handle that? Additionally, would it be advisable to not invest in any more bonds/fixed assets as my quota is more than met, or if I view this I bond as a long term holding would it still be advisable to keep some new investment in bonds which could have a shorter liquidation timeframe? I don't necessarily have any big purchases on the horizon.
Sure you dump future investments into stocks until you are back to target. I bonds are not a long term bond in the usual sense of the word meaning bonds that have a high sensitivity to interest rate changes. Their actual character is short or cash-like in the sense that the asset value does not fluctuate. An I bond held over five years is the ultimate in a highly liquid tax deferred investment failing only that the deferred tax all comes due the year you liquidate the bond and comes due at the end of 30 years no matter what.

Megamill
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Re: I Bond Golden Egg and Asset Allocation

Post by Megamill » Wed Mar 07, 2018 10:08 am

2a704d4b wrote:
Wed Mar 07, 2018 9:26 am
I have been tremendously lucky and have been gifted a golden egg of an I Bond: a fall 2000 bond of 10,000 currently valued at 27,000

On the one hand, I see no reason to sell this rock solid investment and am happy for it to keep on generating 6% interest per year til 2030.

Disable smilies
On the other hand, the presence of this bond does throw of my desired asset allocation from 80/20 (S/B) to more like 55/45 - 60/40.

Any advice on how to handle that? Additionally, would it be advisable to not invest in any more bonds/fixed assets as my quota is more than met, or if I view this I bond as a long term holding would it still be advisable to keep some new investment in bonds which could have a shorter liquidation timeframe? I don't necessarily have any big purchases on the horizon.
How is this possible? I thought the interest rate resets every 6 months on iBonds. I purchased a few for my kiddos (not as far back as 2000), but over 5 years ago when the interest rate was around 5% at purchase time. The few times I've checked online, they had not gained much because of near-zero interest rates. Am I missing something?

JBTX
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Re: I Bond Golden Egg and Asset Allocation

Post by JBTX » Wed Mar 07, 2018 10:11 am

Megamill wrote:
Wed Mar 07, 2018 10:08 am
2a704d4b wrote:
Wed Mar 07, 2018 9:26 am
I have been tremendously lucky and have been gifted a golden egg of an I Bond: a fall 2000 bond of 10,000 currently valued at 27,000

On the one hand, I see no reason to sell this rock solid investment and am happy for it to keep on generating 6% interest per year til 2030.

Disable smilies
On the other hand, the presence of this bond does throw of my desired asset allocation from 80/20 (S/B) to more like 55/45 - 60/40.

Any advice on how to handle that? Additionally, would it be advisable to not invest in any more bonds/fixed assets as my quota is more than met, or if I view this I bond as a long term holding would it still be advisable to keep some new investment in bonds which could have a shorter liquidation timeframe? I don't necessarily have any big purchases on the horizon.
How is this possible? I thought the interest rate resets every 6 months on iBonds. I purchased a few for my kiddos (not as far back as 2000), but over 5 years ago when the interest rate was around 5% at purchase time. The few times I've checked online, they had not gained much because of near-zero interest rates. Am I missing something?
The base fixed rate never varies. The inflation adjustment does vary.

Megamill
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Re: I Bond Golden Egg and Asset Allocation

Post by Megamill » Wed Mar 07, 2018 11:20 am

JBTX wrote:
Wed Mar 07, 2018 10:11 am
Megamill wrote:
Wed Mar 07, 2018 10:08 am
2a704d4b wrote:
Wed Mar 07, 2018 9:26 am
I have been tremendously lucky and have been gifted a golden egg of an I Bond: a fall 2000 bond of 10,000 currently valued at 27,000

On the one hand, I see no reason to sell this rock solid investment and am happy for it to keep on generating 6% interest per year til 2030.

Disable smilies
On the other hand, the presence of this bond does throw of my desired asset allocation from 80/20 (S/B) to more like 55/45 - 60/40.

Any advice on how to handle that? Additionally, would it be advisable to not invest in any more bonds/fixed assets as my quota is more than met, or if I view this I bond as a long term holding would it still be advisable to keep some new investment in bonds which could have a shorter liquidation timeframe? I don't necessarily have any big purchases on the horizon.
How is this possible? I thought the interest rate resets every 6 months on iBonds. I purchased a few for my kiddos (not as far back as 2000), but over 5 years ago when the interest rate was around 5% at purchase time. The few times I've checked online, they had not gained much because of near-zero interest rates. Am I missing something?
The base fixed rate never varies. The inflation adjustment does vary.
ok, I get it...so I just looked up on the treasury direct site and if the OP's $10k iBond was purchased in let's say January, 2000, the interest rate at that time was 5.92% (which explains the nice compounding). I on the other had, purchased $15k of iBonds in 2008 and the interest rate at that time was 2.48%. Ok, I'm jealous now!!!

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Kevin M
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Re: I Bond Golden Egg and Asset Allocation

Post by Kevin M » Wed Mar 07, 2018 11:28 am

2a704d4b wrote:
Wed Mar 07, 2018 9:26 am
I have been tremendously lucky and have been gifted a golden egg of an I Bond: a fall 2000 bond of 10,000 currently valued at 27,000

On the one hand, I see no reason to sell this rock solid investment and am happy for it to keep on generating 6% interest per year til 2030.
This is not the way I Bonds work. If by "fall 2000", you mean sometime between May 1 and Nov 1 of 2000, the fixed rate on this I Bond is 3.60%. If purchased on or after Nov 1, 2000 (before the end of 2000), the fixed rate is 3.40%. I'll assume the bond was purchased in October 2000 at 3.60%.

The inflation component of the rate changes every six months based on inflation. If the bond was purchased in October, the most recent rate changed occurred on October 1, using the May 1 semi-annual inflation rate of 0.98%, and the composite rate currently is 5.60%. The average composite rate over the entire time period would be 5.85%, so pretty close to the 6% figure mentioned, but the rate was as low as 0% for one six-month period due to negative inflation.
On the other hand, the presence of this bond does throw of my desired asset allocation from 80/20 (S/B) to more like 55/45 - 60/40.
If you own other bonds, you could sell some of them to buy stocks to get your AA closer to target.
Any advice on how to handle that? Additionally, would it be advisable to not invest in any more bonds/fixed assets as my quota is more than met, or if I view this I bond as a long term holding would it still be advisable to keep some new investment in bonds which could have a shorter liquidation timeframe? I don't necessarily have any big purchases on the horizon.
Despite your misunderstanding that you will earn 6% on this until it matures, the real rate of 3.6% (or 3.4%) is pure gold in the current rate environment. The real rate on even a 30-year TIPS (with huge term risk) is only about 1%. So I definitely would hold onto the I Bond. I'd make sure I had enough of an emergency fund in other safe assets to ensure that I did not have to redeem the I Bond in an emergency or for other expected or unexpected cash needs.

Other than that, the only downside I can think of by not having other bonds is that you may not be able to rebalance back to target if stocks tank. But to handle this, you need to keep your stock allocation below target now. You could at least partially rebalance by directing all new contributions to stocks if/when your stock allocation drops below target.

Kevin
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Kevin M
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Re: I Bond Golden Egg and Asset Allocation

Post by Kevin M » Wed Mar 07, 2018 11:53 am

Megamill wrote:
Wed Mar 07, 2018 11:20 am
ok, I get it...so I just looked up on the treasury direct site and if the OP's $10k iBond was purchased in let's say January, 2000, the interest rate at that time was 5.92% (which explains the nice compounding). I on the other had, purchased $15k of iBonds in 2008 and the interest rate at that time was 2.48%. Ok, I'm jealous now!!!
The rates you're quoting aren't really the way to think about I Bonds. The only thing that's fixed is the fixed component of the rate, which is the "real" (inflation-adjusted) rate. Depending on when in 2008 you bought your I Bond, your fixed rate is either 1.20%, 0.00% or 0.70%, and your composite rate will change every six months depending on inflation. So yeah, your I Bond real rate is much lower than one bought in 2000.

Real rates have been quite low for some years now. They were much higher in 2000. The 30-year TIPS yield was in the 4% ballpark in 2000, and now is about 1%. In 2008 it went from a low of about 1.7% in January to a high of about 3.4% in October (TIPS yields rose a lot during the peak of the financial crisis). So I bonds were not nearly as good a deal compared to TIPS toward the end of 2008 as they were in 2000.

Kevin
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JBTX
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Re: I Bond Golden Egg and Asset Allocation

Post by JBTX » Wed Mar 07, 2018 12:40 pm

Megamill wrote:
Wed Mar 07, 2018 11:20 am
JBTX wrote:
Wed Mar 07, 2018 10:11 am
Megamill wrote:
Wed Mar 07, 2018 10:08 am
2a704d4b wrote:
Wed Mar 07, 2018 9:26 am
I have been tremendously lucky and have been gifted a golden egg of an I Bond: a fall 2000 bond of 10,000 currently valued at 27,000

On the one hand, I see no reason to sell this rock solid investment and am happy for it to keep on generating 6% interest per year til 2030.

Disable smilies
On the other hand, the presence of this bond does throw of my desired asset allocation from 80/20 (S/B) to more like 55/45 - 60/40.

Any advice on how to handle that? Additionally, would it be advisable to not invest in any more bonds/fixed assets as my quota is more than met, or if I view this I bond as a long term holding would it still be advisable to keep some new investment in bonds which could have a shorter liquidation timeframe? I don't necessarily have any big purchases on the horizon.
How is this possible? I thought the interest rate resets every 6 months on iBonds. I purchased a few for my kiddos (not as far back as 2000), but over 5 years ago when the interest rate was around 5% at purchase time. The few times I've checked online, they had not gained much because of near-zero interest rates. Am I missing something?
The base fixed rate never varies. The inflation adjustment does vary.
ok, I get it...so I just looked up on the treasury direct site and if the OP's $10k iBond was purchased in let's say January, 2000, the interest rate at that time was 5.92% (which explains the nice compounding). I on the other had, purchased $15k of iBonds in 2008 and the interest rate at that time was 2.48%. Ok, I'm jealous now!!!
You definitely want to hold on to those 2000 ibonds - the fixed rate is either 3.4% or 3.6%, plus the inflation rate, which is currently yielding combined around 6%.

https://www.treasurydirect.gov/indiv/re ... dterms.htm

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Re: I Bond Golden Egg and Asset Allocation

Post by Chuck » Wed Mar 07, 2018 1:06 pm

HODL!

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Re: I Bond Golden Egg and Asset Allocation

Post by 2a704d4b » Wed Mar 07, 2018 8:36 pm

Thank you all for the replies.

Yes, I am in agreement that this is a very solid investment and there is no reason to sell just to sell in the name of achieving an AA, the goal of which is to achieve the same returns I am currently receiving with the I Bond, though as mentioned the rates will fluctuate based on inflation rates.

What I am still struggling with is the extent to which I should adjust my intended AA. I see a couple ways forward:

A. completely separate this I bond from the rest of allocation, and invest the rest of my funds 80/20, including with new bond investments. After all, I seek to achieve a ~6% return on my balanced portfolio over time with my AA.

B. consider the I bond as part of my AA and go completely in stocks the rest of the way until my AA starts to approach 80/20

C. do option B above except with a small portion of new investments going towards bonds in order to have accessible liquid investments to draw from if required so that I can avoid touching the I bond til maturity

Of these options, I lean towards C, though I am welcome and thankful for suggestions.

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Re: I Bond Golden Egg and Asset Allocation

Post by Kevin M » Wed Mar 07, 2018 9:17 pm

It might help to step back and think about the rationale for an 80/20 AA. Your AA is determined by your ability, willingness, and need to take risk.

If your willingness easily supports a 40% decline in portfolio value (assuming a 50% drop in stocks), then there's no willingness rational to have any additional bonds other than what you need to hit your 20% target.

Your ability to take risk should factor in the possibility of needing to liquidate some of your portfolio sooner than expected. Whether you handle this with a sufficient emergency fund or a somewhat higher fixed income allocation is up to you, but you should handle it some way.

Your need to take risk should factor in your expected return projections. Since the I bonds have higher expected return than any other reasonably safe fixed-income options available today, you're getting more from the fixed-income portion than you would otherwise, which lowers your need to take risk on the equity side. This would support lowering your allocation to stocks.

I'm just scratching the surface of the considerations that go into using the ability, willingness and need to take risk framework in determining your AA. Perhaps you can take it further.

Kevin
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Re: I Bond Golden Egg and Asset Allocation

Post by Watty » Wed Mar 07, 2018 11:39 pm

2a704d4b wrote:
Wed Mar 07, 2018 9:26 am
Any advice on how to handle that?
I have a very similar amount of iBonds from 2001. I had put some of the money I had for a college fund into iBonds but by the time my kid was in college the rates were too good to cash them out so I used other funds to pay for college. A bit of trivia, back then you could buy savings bonds with a credit card so I got about a 3% rebate when I bought them

One thing about the iBond is that you will have to cash it when you it matures. I am retired and when mine matures in 2031 it will be about a year's worth of expenses so I am just treating mine as a liability matching investment for that year. It was not a huge percentage of my portfolio so I did not include it in my overall stock and bond asset allocation, I basically just treated it as a different asset class sort of like you might treat a pension plan with a lump sum option that you will be eligible for in 2030.

That was just sort of the way it evolved and not some carefully researched plan so that may or may not be the best way handle it.

One thing to check on is that the way the taxes on gifted iBonds work may not be obvious. The giver may have already had to pay taxes on it when it was given so when you eventually cash them you would want to take that into account and not pay those taxes again if that is the case. I don't really understand just how that works do you would need to research how that works.

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Re: I Bond Golden Egg and Asset Allocation

Post by 2a704d4b » Thu Mar 08, 2018 12:41 pm

Kevin M wrote:
Wed Mar 07, 2018 9:17 pm
It might help to step back and think about the rationale for an 80/20 AA. Your AA is determined by your ability, willingness, and need to take risk.
Hi Kevin,

Thank you for your message, which has expanded my thinking on this. All very helpful.

Given what you have said, I would say that my ability to take risk would be the key factor. I do need to maintain some liquidity, some obviously in an emergency fund, but likely some also in some form of fixed asset which I could draw upon before 2030, which points me in the direction of some more investments in bonds.

Given that my willingness to take risk is still high - I am 31 - I see myself taking a strategy of making some limited further investment in bonds, but not necessarily to the extent of trying to meet an 80/20 now with my I bond excluded.

Thanks for opening my mind up a bit on this topic and I will give it some more thought.

John

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Re: I Bond Golden Egg and Asset Allocation

Post by 2a704d4b » Thu Mar 08, 2018 12:52 pm

I have a very similar amount of iBonds from 2001.
Hi,

Nice to hear from another golden era I bonder!

Actually mine was also for college, but in this case it was my father who was the smart person who made the investment and I was the lucky beneficiary. However, it turned out I did not need the bond in college/the returns were good, and so my father held onto the bond.

Well noted about having to cash it out on maturity. This is actually another factor in my situation. I have fluctuating income and work outside of the US, and last year would have actually been a great year to cash it, from a tax perspective, as I would have owed very little/nothing. I guess as maturity approaches I may have to time my exit, but I'll get to that bridge several years from now. I am also not sure actually if it is in my name or my father's name, and so I would need to find that out and the tax implications.

I kind of like the idea of treating the I bond as a separate asset class. This way I could pursue a new AA with the rest of my portfolio, taking into account that I may be willing and able to take some more risk than the initial 80/20 as mentioned above.

Thanks.

John

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Re: I Bond Golden Egg and Asset Allocation

Post by oldcomputerguy » Thu Mar 08, 2018 1:21 pm

Chuck wrote:
Wed Mar 07, 2018 1:06 pm
HODL!
Okay, for those (like myself) who have never seen this acronym:

https://en.wikipedia.org/wiki/HODL
In 2017, Quartz listed it as one of the essential slang terms in Bitcoin culture, and described it as a stance, "to stay invested in bitcoin and not to capitulate in the face of plunging prices." The Street.com referred to it as the "favorite mantra" of Bitcoin holders.

Since entering the Bitcoin vernacular, HODL has become a backronym for "Hold On for Dear Life."
"I’ve come around to this: If you’re dumb, surround yourself with smart people; and if you’re smart, surround yourself with smart people who disagree with you." (Aaron Sorkin)

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