^{Photo by Jason Dent on Unsplash}

Riddle me this: why choose bonds over a high-yield savings account?

My bond portfolio has just sucked. The market goes up, and bonds go down. The market goes down, and bonds go down slightly less. Interest rates go up, bonds don’t move. Sure, there’s the dividend. However, when dividends return at best around 2.5%, that doesn’t make up for my bond ETF being underwater since Feb 2022. And it wasn’t that great in the prior years, either. 

I like to do what I call the 1K Test. If you had two piles of $1,000 and chose to invest them using two different strategies, which wins? I use a five-year window, but you could do ten. The ten-year window can be a little rosier, so I prefer the harsher five. 

Let’s look at my bond ETF. My $1k worth of BND on 1 Jul 2019 is worth $868 today. Ouch. But what about dividends? On $1k, they’re about $24 per year, or about $120 since 2019. So, bottom line, I started with $1k in 2019 and now have $988. That’s not so hot. 

Let’s apply the 1K Test to a high-yield savings account, which is pulling around 5% these days. Of course, interest rates five years ago were less than a percent. Even adjusting for historical rates¹, $1k put into a standard savings account in 2019 would now be worth $1094. 

Winner, by $182 (or a whopping 18.2%) margin: the humble savings account. 

Why even make this comparison? Ultimately, I’m measuring performance against a purpose. Bonds and savings accounts are meant to buffer my retirement should the stock market go sideways (see 2020-2023 and then some for an example). During those down periods, I’ll need funds to tide me over so I don’t sell stocks (or withdraw from my 401K) when they’re in the hole. I’m not shooting for a balanced portfolio; I don’t need a cookie for meeting somebody’s idea of financial prudence. I need a safe buffer for when the bear comes out of hibernation to eat my stocks for breakfast. 

When I do the math, bonds don’t seem to fit my purpose as well as savings accounts. Sure, the Fed will lower rates, taking down retail interest rates in short succession. But I can hedge that risk with CDs. I can balance safety and liquidity with a CD ladder or something similar. Should interest rates bottom out to 2019 levels, I can always buy bonds (or bond ETFs) at the time; it’s not like I won’t see it coming. 

To close, am I smarter than all the financial advice carefully built up from decades of data? Nope. But I think that data is outdated. Like a balanced breakfast, a carefully balanced portfolio has become the goal, even if it never should have been. Ultimately, your retirement portfolio should meet your needs, and when I look at mine, I think it’s time I ended a bad relationship with everyone’s safest investment. 

1. Historical sources
   Finder.com, Historical Savings Rate (2019-2022)
   USAToday.com, Savings Account History Rate (2021-2024)
   BND historical values ↩︎

We like to believe that companies – especially big tech – make decisions based on data. Those of us who’ve worked in tech know all to well that data-informed is too often another form of confirmation bias.

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Every year the IRS adjust things like brackets, deductibles, retirement plan limits, and etceteras. 2023 is no exception and, with inflation at-or-near double digits, these adjustments are worth paying attention to. A few highlights:

401k Limits

The headliner for this crowd is we’ll be seeing increased limits for 401k contributions. Individuals will now be able to contribute up to $22,500 in 2023 – up quite a bit from 2022’s $20,500 limit. The 50+ crowd – eligible for the “catch up” contribution limit – sees there limit rise to $30,000 in 2023.

Other retirement account contribution limits were raised as well. Check out this article from the Hill for further details.

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