There are no official changes to the DAA lineup for December, although we are changing one of the optional refinements. Read on for the full details.

DAA is a core portfolio strategy designed to help SMI readers share in some of a bull market’s gains, while minimizing (or even preventing) losses during bear markets. The strategy involves using exchange-traded funds to rotate among six asset classes, holding three at any one time.

DAA is a defensive, low-volatility strategy that nonetheless has generated impressive back-tested results when evaluated over full market cycles, demonstrating the power of "winning by not losing."

The recommended categories/ETFs for December are (in order of current momentum):

With the significant market upheaval since Friday, we're waiting to get the final end-of-month data before making any SR decisions for December.

There are no changes to Stock or Bond Upgrading this month.

Bond investors haven’t had much to smile about this year. Depending on which maturity one observes (10-year, 30-year, etc.), 2021 has been either the 3rd-, 4th-, or 5th-worst year to own Treasury Bonds in the past 50 years, according to market researcher Jim Bianco.

Meanwhile, October’s Consumer Price Index surged to 6.2% over the prior 12 months. Historically, interest rates have tended to rise in tandem with higher inflation. But in the current cycle, the “transitory inflation” narrative (along with the constant buying by central banks) has kept bond yields subdued thus far. On the same day the latest 6.2% annual inflation rate was announced, the 10-year Treasury bond yielded only 1.5%. That’s an enormous gap — and a significant problem for fixed-income investors.

Against this backdrop, the appeal of U.S. Government I-Bonds is easy to see: their annualized interest rate is currently 7.12%, exceeding any other type of bond yield available. Plus I-Bonds offer favorable tax treatment and significant protection against loss. How is this possible?

I-Bond basics

I-Bonds are savings bonds issued directly by the government to investors. The interest rate on I-Bonds consists of a fixed rate plus an inflation rate that adjusts every six months (the “I” in I-Bonds). Currently, the fixed rate is 0% and the semiannual inflation rate is 3.56%, so the composite (total) semiannual rate is 3.56%. The inflation rate, based on the federal government’s CPI-U rate, adjusts twice a year — on the first business day of May and the first business day of November. Compounding on I-Bonds is semiannual, so if this rate remains unchanged next May, the full-year return would be 7.12%. (Interest is credited monthly and automatically reinvested. The total will result in the semi-annual yield of 3.56%.) Of course, this rate could go up or down every six months.

The disparity between the I-Bond yield and other bonds comes from the fact that I-Bonds are guaranteed to match the rate of inflation. In contrast, other bond yields currently lag inflation by record margins. In other words, I-Bonds have already had their rates adjusted based on the recent surge in inflation, while other bonds have not.

More good news: the composite rate can never fall below 0%. So the only way the yield will decrease is if inflation does. That’s different than the federal government’s other inflation-based bond offering, TIPS (Treasury Inflation-Protected Securities), which can generate negative returns in a deflationary environment.

Another benefit of I-Bonds is their tax treatment. I-Bond interest is exempt from state and local income taxes. And, because you won’t receive any income from your I-Bonds until you redeem them, federal income taxes are not due until maturity (30 years) or redemption, whichever comes first.

I-Bond drawbacks

All of this sounds rather amazing in a world in which 10-year Treasury bonds yield 1.5% and inflation is running 6.2% — but note these three restrictions.

1. Holding Period
   I-Bonds must be held at least 12 months, making them less liquid than other fixed-income investments. If they are redeemed between one and five years, you will lose the last three months of interest. Still, if the inflation rate doesn’t decline before next May, you could buy an I-bond today, redeem it 366 days from now, and earn 5.3% (after forfeiting three months’ interest).
    
2. Purchase Maximums
   In most cases, you can purchase only $10,000 of I-Bonds per calendar year per account holder. If you are due an income tax refund, that refund can be directed to purchase up to an additional $5,000 of I-Bonds.
   
   While these restrictions are significant, a couple who act promptly could potentially buy $20,000 of I-Bonds between now and year-end, then turn right around and buy another $20,000 in early 2022. If you have a tax refund, that could be added on top, up to an additional $5,000 (per return, not per person).
    
3. Direct Purchase Only
   This is a biggie because it means you can’t buy I-Bonds within your retirement or brokerage account. Instead, you must open an account at Treasury Direct. The process isn’t too painful, however, and the purchase money simply transfers from your bank account. So as long as you can get “buy bonds” money into your bank account, you’re all set. (Go here for a helpful purchasing walkthrough.) Trusts and businesses are also eligible to purchase I-Bonds.

Conclusion

Attractive bond opportunities are few and far between right now, but I-Bonds certainly fit that description. If they were easier to own and transact in, they’d already be in every bond investor’s portfolio. This is a rare deal that favors individuals over institutional investors. For once, the little guy comes out on top!

Unfortunately, you won’t find I-Bonds in the SMI strategies because of their purchase restrictions. To be clear: We think I-Bonds are probably the best bond investment available right now — better than the funds currently recommended in SMI’s Bond Upgrading portfolio. We can’t recommend I-Bonds there because of the direct-purchase requirements. But if your portfolio calls for bond exposure and you can work with the TreasuryDirect restrictions, I-Bonds are a great option right now.

December is the most dangerous time of the year for investors who own mutual funds in taxable accounts. Here are some basics concerning taxes and mutual funds that can help you navigate what otherwise can be a tricky and confusing month.

Why Upgrade?

SMI subscribers with a Basic-level membership have access to two investing strategies. These strategies differ in philosophy and the amount of attention required.

Our preferred strategy is Fund Upgrading. It’s based on the idea that if you are willing to monitor your mutual-fund holdings regularly and replace laggards periodically, you can improve your returns. While Upgrading is relatively low-maintenance, it does require checking your holdings each month and replacing funds occasionally. (If you don’t wish to do this yourself, a professionally managed version of Upgrading is available.)

As an alternative to Upgrading, we offer Just-the-Basics (JtB), a strategy based on investing via index funds. JtB requires attention only once a year. The JtB strategy is helpful to SMI members whose workplace retirement plans lack a sufficient number of fund options to make successful Upgrading possible. Here are the funds and percentage allocations we recommend for our Just-the-Basics indexing strategy.

Past returns for both Upgrading and Just-the-Basics are shown on our main page at soundmindinvesting.com. Click the word "Performance" in the middle of the page.

October's CPI (consumer price index) inflation report was a doozie. Year-over-year, inflation rose at a 6.2% rate through October, the fastest rise in 30 years.

When the inflation debate was kicking off early this year, one of the primary arguments against persistent inflation was that the COVID shutdown period in the first half of 2020 was distorting the comparisons — i.e., that inflation only looked high today because it had been so low a year earlier. October's report blows any vestiges of that idea away, as not only was the annual increase massive, the increase from the prior month (September) was a whopping +0.9%. Obviously September 2021 wasn't a particularly depressed starting point to measure against. Worse yet, the inflation wasn't confined to specific areas of the economy — prices rose in nearly every category in October.

Each month, I record a 20-30 minute video update for SMI Private Client, the separate but affiliated business of SMI Advisory Services which manages individual portfolios (SMI Advisory Services also provides portfolio management to the SMI Funds). Austin recently suggested that SMI newsletter premium members might benefit from seeing these videos, given that many of the strategies are applied similarly.

There are no changes to the DAA lineup for November. Read on for the full details.

DAA is a core portfolio strategy designed to help SMI readers share in some of a bull market’s gains while minimizing (or even preventing) losses during bear markets. The strategy involves using exchange-traded funds to rotate among six asset classes, holding three at any one time.

DAA is a defensive, low-volatility strategy that nonetheless has generated impressive back-tested results when evaluated over full market cycles, demonstrating the power of "winning by not losing."

The recommended categories/ETFs for November are (in order of current momentum):

There is no change to the official SR recommendation for November. Read on for the details.

Sector Rotation is a high-risk/high-volatility strategy. While its peaks and valleys have been more extreme than SMI's other strategies, it has generated impressive long-term returns, as discussed in Sector Rotation is Risky, But Highly Rewarding and A Great Strategy Gets Better: Inside Recent Sector Rotation Changes.