By Joshua Kennon. Investing for Beginners Expert
Thanks to his straight-forward approach and ability to simplify complex topics, Joshua Kennon's series of lessons on financial statement analysis have been used by managers, investors, colleges and universities throughout the world. "If an investment idea takes more than a few sentences, or cannot be explained to a reasonably intelligent fourth grader, you've moved into speculation," Joshua insists. "Whether you're dealing with a public company such as McDonald's, or a private company such as Chanel, these are the types of firms that are easy to understand. You know where the sales originate, what the costs are, and how profits are generated. These are the types of enterprises that aren't going to cause you to wake up in the middle of the night, breaking into a cold sweat because of the sub-prime crisis or esoteric securities trading in illiquid markets. That's a huge advantage to growing your wealth. Focus on what you know, pay a fair price, and invest for the long-term.
Have you ever wondered why different Series EE savings bonds mature at different times? For instance, the EE bonds issued in 1981 and 1982 took only 8 years to reach full face value, yet the same EE bonds issued in 2003 took 20 years to reach face value? These drastically different maturity dates are the result of the rate of interest earned on each EE bond when it is issued.
1.) You learned in the Series EE Savings Bond Guide that the paper certificate version of Series EE savings bonds are issued at half of face value. A $100 Series EE bond, for instance, would cost you $50 at the time you bought it. This is different from electronically purchased Series EE bonds bought through the TreasuryDirect program, as well as all Series I savings bonds.
You also learned in Series EE Savings Bonds Interest Rates that the Treasury Department periodically changes the rules for how interest is calculated for savings bonds for new bonds issued after a certain date.
In 1982-1983, interest rates were extremely high. In 2003, interest rates were extremely low. Thus, it took less time for the 1982-1983 bonds to compound from their cost (half of face value) to their full face value. It took more time for the same thing to happen to the bonds issued in 2003 because the interest rate was so low.
One way to calculate this is to use the Rule of 72. This simple tool lets you calculate how long it would take to double your investment at a given rate of return. For instance, if you bought a new Series EE savings bond today with a $1,000 face value (your cost $500) that earned a fixed rate of 1.20%, the active rate as of the day this was published, how long would it take to reach maturity value?
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Simply take 72 divided by 1.2. The answer, 60, is the total years necessary for the bond to double in value.
By looking at the savings bonds in this light, you are better equipped to decide if they are right for your portfolio. You could buy broadly diversified blue chip stocks and earn at least 3% or 4% on your money. Are you willing to watch your account value fall in half, or double, depending on the stock market? If you are in it purely for the cash income and you don't mind volatility. stocks may be a much better option. Only you and your professional adviser can decide what works based on your own needs, resources, and personality. Arming yourself with knowledge makes that decision easier.
Category: Personal Finance