I've always known that savings bonds have relatively lackluster yields, actually losing money to inflation at some intervals, and vastly underperforming stocks in all extended intervals. Following births, Christenings and Birthdays, my kids started to amass savings bonds from relatives to the point that these low yielding instruments comprised a substantial amount of their savings (college funds). Initially, I wasn't keen on watching these grow at such a low interest rate, but on the other hand, these were gifts from relatives and I thought it was appropriate to leave them alone. I hadn't even investigated what cashing them in entailed.

Recently, one of the grandmothers was watching a personal finance show on television where they railed against the abysmal rates of return on savings bonds and how to better invest in a conservative manner. She called my wife to tell her she'd like to see us liquidate the bonds and get them into a higher yielding instrument. Of course, I obliged, since ~17 years is a long time to outlast lulls in the market. The difference between say, 2.5-5% and 9-10% is enormous over such long periods of time. Therefore, I marched down to my local Commerce Bank with some of my kids' savings bonds in hand to cash in. My current setup has some standing cash in a Commerce account for each kid which is set up to have automatic monthly withdrawals into a nice low-fee Vanguard S&P500 fund in a tax-advantaged account. As the balances approach the minimum investment, I simply add in new funds.

When I arrived at the Commerce and stated my intentions, I was initially met with a look of disapproval and concern at the teller's desk - she referred me to the special desk area on the side of the bank. I didn't feel that an explanation was necessary, but I was inclined to explain that at some points in time, these things are actually losing money to inflation, and that the U.S. stock market has never lost money over 20 year periods of time, etc. To that, I was met with barrier after barrier. First, I was told that I needed original birth certificates for each child. Since I only lived a few minutes away, I obliged and returned. Upon returning, I was informed that they couldn't perform the activity for any bond less than 6 months old. I was OK with that since I had some older ones that would suffice. To that, I was met with an error that "the system" was giving her that wouldn't allow some of these to be exchanged, even though the dates on the face were clearly a year old or more. An additional stipulation was that the total value of all exchanges could not exceed $1,000 for any particular person performing exchanges.

After much ado, I was able to exchange a fair amount of savings bonds gifted to my children (endorsed by some givers), deposit the funds, and then set up an additional transfer into the Educational Savings Accounts (ESA - More in another post on differences between ESA and 529 and why I landed with the ESA). As I was ready to depart, another associate at a different desk who had been looking on in horror told me she recommended I put these funds in a safe place, like a Commerce CD, handing me a pamphlet. I looked at the rates and said no thanks to their offer of 4.6%. Based on the reactions I endured, it was as if I had sent my 3 year old to work in the coal mine for extra cash or something. The question is, "Was this transaction really that outrageous?"

Based on an LA Times article, research by Schwab Center for Investment Research in San Francisco showed that:

"...while an older investor must factor in the risk that the market could be depressed for many years--it has happened before, after all, such as in the 1970s--a younger investor can be comforted by this fact: A diversified portfolio of U.S. stocks has never lost ground in any 20-year period..."

LA Times Article:
http://www.latimes.com/business/investing/la-invest101-story1a,1,1322592.story?page=1