Savings Bonds: Risky, but Not in the Traditional Sense

Savings bonds are a type of investment that are not generally considered to be risky. However, this type of investment is subject to certain types of risk. Here are a few things to consider about the risk that is associated with savings bonds.

Savings Bonds

Savings bonds are a type of investment that is offered by the United States government. Investors can purchase these savings bonds directly from the United States Treasury website or from any bank. Once the investor purchases the bond, they can hold onto it for as long as 30 years and it will continue to draw interest. Most investors believe that this is a risk-free type of investment. Since it is backed by the full faith of the United States government, many people believe that it is without any type of risk. While it is not going to be subject to the normal default risk that other investments have, there are some different risks that are present.

Liquidity

One of the biggest risks with savings bonds is liquidity. When you invest in savings bonds, you are not going to be able to cash them in right away. You also cannot sell them on the secondary market to other investors. Savings bonds are registered to your Social Security number and your name. This means that you have to hold onto them until you cash them in. With savings bonds, you cannot cash them in for at least six months. With some types of savings bonds, you have to wait at least one year before cashing them in. Even though you can cash them in after one year, you most likely will not want to because you are going to be penalized. If you cash them in within five years of the issue date, you are going to have to forfeit the last three months worth of interest. When you are receiving a relatively low amount of interest anyway, you do not want to forfeit any of the interest that was accrued.

Inflation

Another big risk that you will have to deal with it is inflation. Savings bonds sometimes have trouble keeping up with inflation rates. If you cannot earn more than inflation, there is not much point in investing in savings bonds in the first place. Some savings bonds are only going to pay you about 1.7 percent per year. When inflation averages about 3 percent per year, there is a chance that you are going to be losing money with this type of investment. 

Opportunity Cost

Something else that you will have to consider is the opportunity cost of investing in savings bonds. Most investors have a limited amount of money that they can invest. When you put a certain amount of money into savings bonds, you are going to have less money to invest in other things. For example, if you give up the chance to invest in a stock that pays 10 percent to invest in a savings bond that only pays 1.7 percent, you are losing 8.3 percent. 

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