Inflation is easing, and the general consensus is that the Federal Reserve is likely to begin cutting rates next year. Opinions about the possibility of recession vary, but the risk is still very much there in 2024.

Given these factors, there are some things investors should consider.

Recession Options

As economic growth slows — regardless of whether a recession actually arrives — central banks typically reduce interest rates to spur economic recovery. This causes yields on short-term cash options like money market funds to decline.

While newly issued bonds eventually reflect lower rates, the interest remains fixed until the bond matures or is redeemed by the issuer. This allows investors in longer-maturity bonds to maintain today’s comparatively high yields well into the future, offering resilience when short-term investment returns are impacted by rate decreases. Remarkably, bonds have been the sole asset class since 1950 to achieve double-digit gains during recessions, serving as a stabilizing force against declines in equity markets.

Historically, intermediate corporate and government bonds with 3-to-10-year maturities have delivered higher returns than cash or equities during periods of slowing growth and falling rates. By laddering individual bonds or owning bond funds, investors can maintain their portfolio’s income generation capacity while circumventing risks associated with overweight cash allocations.

This strategy allows for continued yield without forcing heightened stock exposure at potential market bottoms. Ultimately, it enables the durability of returns needed to achieve financial goals despite shifting macroeconomic winds.

Inflation Options

If you are still concerned about inflation, and you don’t like the idea of corporate bonds, you might consider Treasury inflation-protected securities (TIPS). The U.S. Department of the Treasury issues TIPS, which are designed to protect investors from inflation by adjusting their principal value based on changes in the Consumer Price Index (CPI).

TIPS provide a steady income stream through interest payments, and the total return is a combination of interest income and changes in the inflation-adjusted principal.

A related alternatives to TIPs are the Series I Savings Bonds (“I Bonds”) from the U.S. Treasury. These bonds earn interest based on both a fixed rate and a rate that is set twice a year based on inflation. The bond earns interest until it reaches 30 years or you cash it, whichever comes first.

Currently I Bonds pay a 5.27% annual rate through April 2024. These are definitely worth considering up to the annual purchase price limit if you are a fixed income investor seeking to keep up with inflation.

To purchase I Bonds, you need to establish a TreasuryDirect account or buy them in paper form using your federal income tax refund. Each calendar year, you can buy up to $10,000 in electronic I bonds from TreasuryDirect and up to $5,000 in paper I bonds using your federal income tax refund. The limits apply separately, meaning you could acquire up to $15,000 in I bonds in a calendar year.

Regardless of whether continued inflation or recession risks have you concerned, you should give some consideration to allocating some money to fixed income assets in 2024.

Editor’s Note: Robert Rapier just provided you with invaluable investment advice. But we’ve only scratched the surface of our team’s expertise.

For market-thumping gains with mitigated risk, I suggest you also consider the advice of our colleague Jim Pearce, chief investment strategist of Personal Finance.

Personal Finance, founded in 1974, is our flagship publication and it has helped investors build wealth for nearly 50 years.

Case in point: If you had taken the initial recommendation of Personal Finance to buy Chevron, and held on, you’d be sitting on a whopping return of nearly 3,200% (that’s not a typo).

Want to get aboard “The Next Chevron?” Click here for details.

Subscribe to the Investing Daily video channel by clicking this icon: