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POV: Why Everything You Know about Retirement Investing Is Wrong

Conventional financial planning underplays inflation-protected bonds

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“POV,” a new addition to BU Today, is an opinion page that provides timely commentaries from students, faculty, and staff on a variety of issues: on-campus, local, state, national, or international. Anyone interested in submitting a piece, which should be about 700 words long, should contact Rich Barlow at barlowr@bu.edu.

This column originally appeared on the PBS NewsHour’s Making Sen$e Business Desk site.

Recently, Paul Sullivan wrote in his New York Times column about financial advisors’ increasing interest in technology. He raises two questions about expanded use of technology: Will it help advisors do their job better? And will it be better for clients or confuse and frustrate them?

Remember the old saw about computer forecasting models? GIGO—garbage in, garbage out. Technology can make good advice more accessible and less costly, but it cannot turn bad advice into good advice. If the technology is designed to pitch some investment service that is not in the best interest of clients, employing sophisticated technology and interactive software will only serve to deceive the client more efficiently. Fancy software is not a substitute for trustworthiness and good science.

Let me give an example to make clear what I mean. As many of you know if you’ve read earlier PBS NewsHour’s Making Sen$e Business Desk site posts of mine on I Bonds or how to pick a financial advisor, I recommend that for people concerned about preserving the purchasing power of their savings, an investment program should start with the purchase of US Treasury Series I Savings Bonds, of which you can purchase up to $10,000 per year per person.

To quote the Treasury Department’s write-up online, which I urge everyone to read in full:

“You can cash them in after one year. But if you cash them in before five years, you lose the last three months of interest. (If you cash in an I Bond after 18 months, you get the first 15 months of interest.)”

I Bonds provide the ultimate in long-run liquid financial security to residents of the United States. An investor in these bonds cannot lose any money or any purchasing power for up to 30 years, despite either inflation or deflation. They provide a return at least equal to the rate of inflation, and often, have paid a “premium” of interest above and beyond inflation.

At the moment, because of historically low interest rates, that premium is zero, but it is reset every six months. If, in September (or the following March or a year from September, etc.), new I Bonds do offer a premium, you can sell the current ones and use the money to buy the new ones. The US Treasury started issuing I Bonds in 1998, and over the intervening 15 years technological improvements have made it easier than ever for people of modest means to purchase them online through TreasuryDirect.gov and keep track of their increasing value, a value that, by the terms of the bonds, keeps pace with inflation.

You might wonder why a bond that pays, at the moment, only the rate of inflation is a good investment. Simple: compare it to an equivalent investment issued by Treasury that is not inflation-protected. The equivalent would be a six-month Treasury “bill.” It is paying less than 1/100th of a percent at the moment. Since inflation is running at 1.8 percent right now and an I Bond automatically pays you the inflation rate, the I Bond would seem to be rather obviously the debt instrument of choice.

Yet despite their clear value as a safe and liquid anchor for any investment portfolio, few clients of investment advisors even know of the existence of I Bonds. Bona fide advisors who are truly fiduciaries serving the best interest of their clients would inform them about I Bonds, direct them to the US Treasury’s TreasuryDirect.gov website, and assist them in setting up accounts for themselves and their children. To the best of my knowledge, no major investment advisory firm in the United States does this.

When the chief financial officer of a West Coast nonprofit followed my counsel on “How to Find a Financial Advisor, Step by Step,” he asked the several financial advisors he auditioned if I Bonds were part of their advice. Not one of the advisors said they were. That is not a function of their mastery—or lack of mastery—of technology. It can only be explained in terms of self-interest or ignorance. There is no profit margin in advising clients to purchase I Bonds. And of course, if you don’t know about them, how can you suggest them?

Instead of practicing prudence, however, investment advisors tend to deploy the latest innovations in digital technology to promote the products of those with an even greater incentive to steer you wrong—members of the financial services industry. That industry specializes in pushing the product with the highest profit margin: stocks. The content of financial services materials is often deceptive and in some cases flatly contradicts what financial economists recommend as sound.

As I have shown repeatedly, no matter how broadly diversified a portfolio of stocks, conventional bonds, and cash may be, it cannot offer the protection afforded by I Bonds. The proposition that the risk of stocks diminishes with the length of one’s time horizon is a fallacy, as is the notion that stocks are a hedge against the risk of inflation. I figure it’s about time for every American to be thinking about I Bonds.

Zvi Bodie, the Norman and Adele Barron Professor of Management and a School of Management professor of finance, can be reached at zbodie@bu.edu.

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