sell them to another investor, and you’ll forfeit three months of interest
if you redeem them in less than five years. Thus they are suitable
mainly as “set-aside money” to meet a future spending need—a gift for
a religious ceremony that’s years away, or a jump start on putting your
newborn through Harvard. They come in denominations as low as
$25, making them ideal as gifts to grandchildren. For investors who
can confidently leave some cash untouched for years to come, infla-
tion-protected “I-bonds” recently offered an attractive yield of around
4%. To learn more, see http://www.savingsbonds.gov.MOVING BEYOND UNCLE SAM
Mortgage securities.Pooled together from thousands of mort-
gages around the United States, these bonds are issued by agencies
like the Federal National Mortgage Association (“Fannie Mae”) or the
Government National Mortgage Association (“Ginnie Mae”). However,
they are not backed by the U.S. Treasury, so they sell at higher yields to
reflect their greater risk. Mortgage bonds generally underperform when
interest rates fall and bomb when rates rise. (Over the long run, those
swings tend to even out and the higher average yields pay off.) Good
mortgage-bond funds are available from Vanguard, Fidelity, and Pimco.
But if a broker ever tries to sell you an individual mortgage bond or
“CMO,” tell him you are late for an appointment with your proctologist.
Annuities.These insurance-like investments enable you to defer cur-
rent taxes and capture a stream of income after you retire. Fixed annuities
offer a set rate of return; variable ones provide a fluctuating return. But
what the defensive investor really needs to defend against here are the
hard-selling insurance agents, stockbrokers, and financial planners who
peddle annuities at rapaciously high costs. In most cases, the high
expenses of owning an annuity—including “surrender charges” that gnaw
away at your early withdrawals—will overwhelm its advantages. The few
good annuities are bought, not sold; if an annuity produces fat commis-
sions for the seller, chances are it will produce meager results for the
buyer. Consider only those you can buy directly from providers with rock-
bottom costs like Ameritas, TIAA-CREF, and Vanguard.^11
110 Commentary on Chapter 4(^11) In general, variable annuities are not attractive for investors under the age
of 50 who expect to be in a high tax bracket during retirement or who have