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The ABCs of I bonds
THE MOTLEY FOOL
Ask the Fool
Published: May 3, 2022
Q: What are "I bonds"? -- P.G., Mansfield, Ohio
A: Series I savings bonds are offered by the U.S. government with interest payments that are adjusted for inflation. You can buy as little as $25 worth or as much as $10,000 per year (per individual) at TreasuryDirect.gov.
The interest paid by "I bonds" has two components -- a fixed rate and a variable rate adjusted twice a year to account for inflation. At the time of this writing, the rate was a robust 7.12% for bonds bought through April 2022. (Inflation has been unusually high recently, resulting in the high rate.)
The I bond has a "maturity," or lifespan, of 30 years, and the interest you earn on it is paid when you redeem it. You can redeem it as soon as one year after buying it, but you'll forfeit the last three months of interest. After five years, you can redeem the bond without penalty.
I bonds can protect your money, but your long-term dollars are likely to grow much faster in stocks.
Q: I've been investing directly in a certain company's stock for a long time without paying any broker commission fees. Is that smart? -- S.B., St. Augustine, Florida
A: There's nothing wrong with it. You're probably investing via a direct investing plan or dividend reinvestment plan ("DRIP"). Such plans have existed for many years and are offered by lots of companies.
These days, though, many brokerages will also reinvest your dividends in more shares (or fractions of shares) of your stocks. And many brokerages also don't charge any trading commissions. Learn more at this URL: Mot.ly/drip.
Fool's School
Think Twice Before Day Trading
The idea of day trading -- buying and selling securities such as stocks many times throughout the day, perhaps holding them for only minutes or hours -- can be appealing. You may hear of some people making a lot of money that way. But odds are, you haven't heard about the many day traders who lose a lot of money.
Day trading can resemble gambling more than investing. Successful long-term investors often study a company's fundamentals (such as revenue and earnings growth rates, profit margins, and cash and debt levels) before investing in its stock. They'll also research the company to understand how it makes its money, how it compares to peers and what its risks and opportunities are. They typically aim to hang on to their shares for years.
Day traders, on the other hand, may not know any details about the companies they're buying into and selling out of, such as what kind of business those companies do. When day traders do make money, their gains face the short-term capital gains tax rate. While the long-term capital gains tax rate is currently 15% for most people and 20% for high earners, your short-term rate is the same as your income tax rate -- 22%-24% for most middle-class people, and as high as 37% for high earners.
Then there are trading costs. Though they can be very low, depending on the brokerage or trading platform used, paying less than a penny per trade can add up if you're making hundreds of trades per day. Worse, many day traders trade with borrowed money, which can amplify their gains, but will also amplify their losses. Many lose much more than they invested in the first place.
You can amass great wealth without ever day trading. But if you're still interested, read up on all the dangers -- and stick to objective sources, not platforms urging you to trade. Multiple regulators and government agencies have issued warnings about day trading.
My Dumbest Investment
In the Weeds
My dumbest investment was buying shares of a company in the marijuana business. I bought it after very little research, knowing only that weed stocks were rising. Now it just sits in my portfolio and stares at me -- with its loss of 50%. I'm hoping it rises a bit so I can sell. -- V., online
The Fool responds: You started off well, noticing a sector that was experiencing a lot of growth -- more states and countries have been legalizing the use of marijuana, both medical and recreational. High-growth sectors can be great places to spot high-growth companies -- but it can also be hard to figure out which companies will dominate in the future, and which will fizzle out.
With lots of marijuana companies around these days, many are lowering prices in an attempt to boost their market share. That can be an effective strategy, but it can also lead to shrinking earnings and perhaps prolonged losses.
Think twice about hanging on to your shares in the hope of a rebound. Some research into the company may be in order. If you don't have much confidence about its future, just sell, take the loss and focus on one or more stocks that are more promising. Otherwise, you may end up waiting a long time while many great alternative stocks grow in value.
Foolish Trivia
Name That Company
I trace my roots back to Stuttgart, Germany, in 1886, when a mechanical and electrical engineering workshop was founded. My better-designed magneto ignition devices for cars were an early hit, and my automotive lights made nighttime driving safer. By 1910 I had sales offices around the globe. Over time, I expanded my scope into fuel-injection systems, power tools, electronic components, household appliances, packaging and more. Now I'm getting into the Internet of Things, smart homes and artificial intelligence. I employ more than 400,000 people and rake in around $85 billion annually. I can help you clean up after dinner. Who am I?
Last Week's Trivia Answer
I trace my roots back to California in 1980, when I was launched as an applied molecular genetics company. Initial endeavors included trying to grow chickens more rapidly, and an early success was cloning a gene that led to my successful drug Epogen, which treats anemia. Today, with a recent market value of $135 billion, I'm a biotechnology powerhouse, primarily focused on cardiovascular disease, oncology, bone health, neuroscience, nephrology and inflammation. My top sellers include Aranesp, Enbrel, Kyprolis, Neulasta, Nplate, Otezla, Prolia, Repatha and Xgeva. I'm one of the 30 companies in the Dow Jones Industrial Average. Who am I? (Answer: Amgen)
The Motley Fool Take
Luxurious Profits
RH, the high-end home furnishings chain formerly known as Restoration Hardware, isn't your typical home furnishings company. It's a luxury brand known for selling things like $3,000 armchairs and $4,000 coffee tables. While the home furnishings industry is highly competitive, RH faces much less competition at the luxury price point than midrange retailers like Wayfair do.
Along with its designer products, the company also distinguishes itself with an enormously successful membership model, which offers customers a discount of 25% and other benefits for a $175 annual fee. As of January 2021, RH had 434,000 members who drove 97% of its revenue in its core business. The membership program should also help cushion the company from economic volatility, as it essentially creates a built-in customer base.
Management plans to keep growing the company by expanding abroad and by widening the scope of its offerings. It's opening its first hotel in New York City, and will make two Gulfstream airplanes and a yacht available to be chartered, as it works to make RH a luxury lifestyle brand beyond home furnishings.
With a clear track record of success and a CEO who aims to push the boundaries in luxury home goods, RH still has a lot of room to grow. Long-term investors may want to take advantage of a recent drop in share price. (The Motley Fool owns shares of and has recommended RH.)
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