Friday, December 26, 2008

I Bonds or I Savings bonds vs. Certificates of Deposits

The other day I was wondering about long term investments , something with a horizon of 5-10 years and I came across I bonds or I saving bonds.
thanks to a friend who introduced to me these safe government protected investments.

According to "Bonds have a one year minimum hold time in which the bond can not be redeemed. Additionally, bonds are subject to a 3 month interest penalty if the bond is redeemed within 5 years of the issue date. Similar to other US Treasury Bonds, I Bonds continue to earn interest for 30 years. After that time, the matured bond is worth the face value plus the interest collected over that time."

The most logical comparison that arrives at one's mind is between a CD and an I-bond. How does an I bond differ from
a 5 year CD.
1. CD's rates are fixed for the entire duration of the term. I bonds are inflation protected and have 2 parts , one called the fixed rate which stays the same for the entire duration
of the bond and a variable value which is tied to the inflation core index
2. One can withdraw money from a CD even before one year with an associated penalty ofcourse but atleast its an option.
3. With most banks money withdrawn from a CD before maturity is subject to three to six months of interest. Money withdrawn
from an I bond after 1 year is subject to similar but not neccessarily same terms.
4. Current rate for an Ibond is 5.64 % which ofcourse can and will change in the next five years. CD has constant rates of maturity
5. CD is protected by FDIC values whereas Ibonds are backed by the government.
6. According to "The federal tax can even be waived if the bond is redeemed to pay for education costs." This definitely not the case with CDs.

I bonds rate are weighted more on the CPI or variable rate rather than the fixed part so one should typically not wait till fixed part is higher. Essentially these are inflation protected investments.

Interest accrued on I bonds is on the end of the month, so its advisable to invest towards the end of the month.

Please note that I have not compared I bonds to other available government bonds in this article. CDs are something that naturally occured to me and hence the

Is this a safe longterm investment in this recession season?

Sunday, December 21, 2008

The January effect: Lets discuss about the 2009 January effect

It is believed that in January, particularly during the first few week(s) has witnessed gains not seen during other months of the year. According to Wikipedia link for the January effect it is said that this may happen due to profit gains taken in the prior
year for tax purposes and investors put their money back in the market for re-investment.
To see if this really worked lets take a look at the past few years return for the NASDAQ index QQQQ.
In Jan 2008 we saw that QQQQ went down few percentage points. 2006, 2007 saw a modest gain , whereas 2005 saw some decline. 2004, 2003, 2001 and 2000 had some gains
whereas 2002 had a loss.

This result was based on the NASDAQ index. One might need to take into consideration other indexs or stocks (NYSE for example) particularly.
AS per this article it is said that small caps have had some
noticeable returns in January.
However one needs to be extremely cautious to trade small caps such many of them are not doing perform very well.

On the contrary if one could wait till January to sell the stocks the losses could be minimized. This is just another view of the same idea.

Other theories behind the January stock rise state that a lot of people might be getting some year end bonuses or some wait till the new year to start afresh. Cash strapped investors are seen selling just before big holidays -eg. Christmas to raise cash for gifts.

We will analyze the market towards the end of January 2009 .

What will happen in 2009? Will it show a January effect or have we seen a December effect already seen we are in the oversold region already? Please share your thoughts.