Zvi Bodie, safe-investing proponent and financial services industry gadfly, says Series I savings bonds are the best investment for most people, yet few know about these inflation-protected bonds that can be easily obtained with a few clicks of the mouse at the Treasury's website. Bodie (left), a veteran professor at Boston University, on Thursday launched the website for his most recent consumer-oriented book, Risk Less and Prosper.
The book is critical of most though not all financial advisors, and in an interview with AdvisorOne, Bodie lamented that advisors are not telling their clients about Series I savings bonds, which currently pay 2.2%, or the rate of inflation on top of a base rate currently fixed at 0%. U.S. citizens can currently purchase up to $10,000 of I bonds per person per year.
AdvisorOne: What is the essential value proposition of Series I bonds?
Bodie: For most Americans the safest investment is Series I savings bonds. For the past several years the U.S. Treasury has been offering these bonds to the public at a guaranteed interest rate that is at least equal to the rate of inflation for a period of 30 years. This means that for every dollar you invest today, you have the right to take it out fully adjusted for inflation at any time over the next 30 years. So in a worst-case scenario (unless the U.S. government defaults), you will have maintained the purchasing power of your money.
AdvisorOne: Are there are other benefits to owning them?
Bodie: If the Treasury raises the interest rate above the rate of inflation, you can cash in your old bond and buy a new one with no loss of accumulated interest. If you have held the old bond for over 5 years, there is no penalty when you cash it in.
AdvisorOne: Can advisors' clients build a retirement off of these bonds?
Bodie: I know of no safer way to invest for a long time horizon. For people of modest income, a combination of Social Security and an annual investment of up to $10,000 per year in I Bonds should suffice to finance a comfortable retirement without any significant risk and without any special tax-deferred retirement accounts. For example, a 30-year-old who buys $10,000 per year of I Bonds and retires at age 70 will have accumulated $400,000 of today's purchasing power. Even at today's high prices that would be enough to buy a guaranteed lifetime inflation-proof income benefit of more than $16,000 per year from a high quality insurance company. I believe that this option ought to be brought to the attention of every American by the government and trustworthy financial advisors.
The new website for Risk Less and Prosper contains a video page consisting of nine simple explanations of what regular working Americans. These videos, plus a tenth that was omitted from the book site, were created in 2009 for employees enrolled in Boston University's 403(b) plan. In a novel employee retirement benefit, Boston University's Human Resources website offers employees retirement investing advice from two of its faculty notables, Bodie and Laurence Kotlikoff.
The university's retirement planning resources and tools aim to help employees confused about investing while at the same time showcasing their in-house experts. Bodie's videos are aimed at simplifying key concepts of retirement investing.
Video 1, called "The Conventional Wisdom is Wrong," is an economist's rebuttal to the conventional Wall Street idea that long-term investors should be in stocks. "The length of your time horizon has nothing to do with your willingness to take risks," Bodie says. "Stocks are just as risky in the long run as in the short run. In some ways stocks are even riskier in the long run," he adds. The finance professor explains that one's time horizon instead determines the appropriate safe asset class—money-market instruments for a short term, and long-term bonds for a longer term.
Video 2, called "You're on Your Own," discusses the demise of defined benefit plans and the prevalence today of defined contribution plans like 401(k)s and 403(b)s, where employees themselves assume all investment risk.
"Essentially, you're on your own today," Bodie says. The professor criticizes the trend toward target-date lifecycle funds as default options, which he says give investors a false sense of security that when their retirement target date (say, 2040) comes up, they've achieved their goal. But target-date funds offer no guarantees whatsoever, he says, pointing out that those invested in 2010 target-date funds lost 30% or more of their portfolio just before their retirement.
Video 3, called "Set Realistic Goals," counsels using TIPS as a starting point for building your portfolio with rates that guarantee inflation will not erode the value of the principal investment. Bodie cautions investors putting money into stocks that they must increase how much they save commensurate with the risk of losing on those investments (while superior investment results early on may allow investors to save less in the future).
Video 4, called "The Safest Investment is TIPS," goes a little deeper into Treasury inflation-protected securities, advising investors to start off by determining how much they would have to save if they want to take no risk at all.
As in Video 1, Bodie criticizes investment industry literature (and even the SEC's website) for promoting the idea that investors should rely on stocks to hedge against the risk of inflation. That's "going out of the inflation frying pan and jumping into the stock market fire," he says.