The last few years have taught serious investors the dark side of accepting fixed returns: when you lock in a yield, you lock out the worst possible outcomes but you also lock out any chance of reaching for a better future. And when the yield you settle for is too low, you've effectively conceded the game . . . there's no way to win.
That's not why people participate in financial markets. It's definitely not what they usually pay their advisors to provide. They want better outcomes, a better life. They can hide money under the bed on their own for free and watch it lose purchasing power when inflation, taxes and RMDs get in the way.
But try telling that to the chorus of earnest children who all seem to have Googled "investments that do well in high inflation environments" when gold and crypto alike faltered last year and discovered something seemingly exotic called an I bond paying a superficially breathtaking 9.6%.
None of them ever bothered to point out that that's all inflation. In real terms, you're locking in as close to zero as it gets for as long as you own those bonds. And if you flip them in under five years, a slice of that tiny interest payment is forfeit. Either way, you're stuck in them for at least a year.
Of course all professionals know that the inflation piece ebbs and flows with the CPI. If the Fed's projects are on track, those "breathtaking" 9.6% yields get cut by two thirds by November. Meanwhile, Treasury bills still pay 5% . . . not far above the latest CPI, but at least you're keeping your head above water, making a little progress.
I bonds issued between 2020 and last November, on the other hand, will never pay a single basis point above the CPI. Ever. They won't lose any purchasing power or subject capital to risk, but they'll never get ahead. The real return is fixed at zero . . . or in the last six months, at a lofty 0.40%.
Come on. Money markets are paying 4.6% a year and are as close to "safe" as most circumstances require. When the inflation piece resets, that's going to be a mighty competitive zero-risk proposition.
We already lived through this story. Back in the wake of the 2008 crash, the Fed was printing money and a lot of retail investors who lacked the nerve to stay in stocks for the long haul started chasing inflation protection.
While I bond payouts did not go negative with inflation, they did manage to pay zero for awhile in 2009. Not locking in a loss or even open to downside volatility in the stock market, but not exactly winning. Long bonds locked in 3% a year at the time.
Luckily the days of Treasury being automatically "trash" in real terms are over. Clients no longer need to reckon with locking in an inflation-adjusted loss . . . effectively paying all their potential returns as insurance to avoid doing even worse in the stock market.
I hope your clients aren't doing that badly. There's always something working. Our Model Portfolio and SMA Strategist Guide this year features some managers who actually delivered the defense others promised, more than keeping up with inflation.
But either way, you've kept them around. And the hype around I bonds is going to vanish very fast just like it did in 2009. As an insurance policy, they're just too expensive. It isn't worth closing that piece of the portfolio off to an expansive future.
What do you tell clients who want to hold money under the bed where it's safe from everything except inflation? It's a similar conversation.
And then there are TIPS, which are in such hot demand that once again yields turned negative. A negative number doesn't earn a lot of clickable headlines. Nobody talks about them.
My hot take: buy TIPS when they fall from favor. Keep part of a client's fixed income in inflation-protected instruments. But don't pay too much for the privilege.
They're just like anything else in the market: insurance policies, growth stocks, all of it. At the right price, they're great. But when the crowd has pushed prices to ridiculous levels, safety can be suffocating. It just costs too much.
