Well the earth and I both completed another revolution around the sun. The Build Back Better Act got shelved with a big Joe Manchin thumbs down prior to Christmas. My alarm to stop my 401k after tax contributions and Roth conversions by 7pm on Dec 31 was ignored. By noon on Jan 1, I cued up his and hers $6k nondeductible traditional IRA contributions for 2022. Once the market reopens and those clear next week, I’ll convert them to our Roth IRAs.
2021 was an amazing year for S&P500 and VTSAX returns. The S&P500 returned 26.89% and VTSAX 26.64%. In the last week of December I decided to trim some winnings and sold $65k of the total stock market index fund in my 401k and started a position in an inflation protected bond fund. My target asset allocation of 80/20 stocks/bonds had drifted closer to 85/15. When all the year-end dust settles, I may have overshot to 78/22 but we’ll sort that out in the next quarterly or semi-annual rebalance.
I also hold a total bond market fund in my 401k but last September it switched from an index fund to an actively managed fund with no details yet on changes to the expense ratio nor the investment composition. Someone dropped the communication ball. The total bond market fund had a -1.69% return in 2021. I did see yesterday that my 401k added the option of Vanguard’s Total Bond Market Index Fund Institutional Shares (VBTIX). I will continue to sort out my feelings on whether to dump the now actively managed total bond fund for the inflation protected bond fund or VBTIX in the next month or two.
I made one other “bonds are for old people” move last week and decided to purchase a Series I Savings Bond from TreasuryDirect.gov. I had been reading all these grand things on the latest 6-month inflation adjusted composite rate of 7.12% for I Bonds. The cash was sitting in a Capital One savings account earning 0.4%. I have to hold the I Bond for 1 year and if I redeem it anytime between 1-5 years, I forfeit 3 months of interest payments. Better than a CD where the 5 year rate is currently 1.0% and you’d forfeit 6 months of interest for cashing it prior to term. I Bond interest income is state and local tax free and the federal tax can be deferred until the bond is redeemed (up to 30 years). I Bond interest is also federal tax free if used for qualified higher education expenses. We have plenty of those forthcoming.
The I Bond experiment may fail like my 5 year CD ladder experiment. I have two more 5 year CDs that will mature on my next two birthdays. I finally decided with CDs, it wasn’t worth the hassle when interest rates dropped below 2%. Or perhaps I Bonds will be a decent inflation hedge. Time will tell. Either way, they’ll fit my continual improvement goal of decreasing interest income and increasing qualified dividend income. They will also keep me cash poor and hungry for more investment opportunities.
