The Motley Fool: Understand savings bonds — to the letter

If you’re looking for safe, slow growth, consider U.S. savings bonds, which are backed by Uncle Sam. Some even offer inflation-adjusted returns! In a nutshell:

“Series EE Bonds: These have replaced the Series E bonds. Their interest rate as of 2005 is fixed, and it was recently 3.4 percent. The bonds pay interest for up to 30 years, and you can buy up to $30,000 worth of the bonds per year, either electronically or on paper.

“Series HH Bonds: These bonds have been phased out, so you might not be able to get your hands on them anymore.

“I Bonds: The “I” stands for “inflation,” because the return on an I Bond is a combination of a fixed rate (established at the time of purchase) and a floating rate that is adjusted every six months based on the Consumer Price Index for urban users (CPI-U). You can buy up to $30,000 worth per year.

“Treasury Inflation-Protected Securities (TIPS): These are Treasuries, not savings bonds. But people buy TIPS for the same reasons they buy I Bonds — inflation protection and safety. The interest rate on TIPS stays the same, but the principal is adjusted to keep up with inflation. Better still, the interest is based on the pumped-up principal, so not only has the value of your investment increased, but you’ll also receive more interest.

There’s a lot more to learn about savings bonds before you invest. Start at the horse’s mouth: www.savingsbonds.gov. For info and rates on CDs and money market accounts, drop by www.fool.com/savings/savings.htm.

Ask the Fool

Q: Are there any good strategies for investing in CDs? — P.B., St. Louis

A: Think about where interest rates are headed. If you expect them to fall over the coming years, you might want to lock in current higher rates by buying some long-term CDs. If you expect them to rise, consider “laddering.” CDs with longer maturities are carrying higher interest rates right now. So you might, for example, put a third of your money in six-month CDs, a third in two-year CDs and a third in five-year CDs. Then, as each matures, invest in new three-year CDs at the current rates, which may well be higher. That way, you’re not locking yourself into low rates for a long time.

My dumbest investment

This is painful. I got a mailing for a company that “could” go through the roof. I bought two lots of shares, totaling $25,000. The stock zoomed up 80 percent over the first two days and then plummeted. I lost $11,000. Then I followed the stock and saw that it was volatile. I thought I might be able to recoup some of my losses, so I bought an additional $5,000 worth. The stock is now down 25 percent. It’s embarrassing as well as financially painful. I haven’t been investing for very long and thought I could make some easy big bucks. — G.C., Canton, Ohio

The Fool Responds: Don’t be too embarrassed. Most new investors and many seasoned ones have made some big blunders. Just be wary of any mailings suggesting that you can get rich quickly. If an investment is really that promising, those who know about it would want to snap up all the shares for themselves.