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
I Cashed in My Kids' Savings Bonds. Am I a Bad Parent?
July 3rd, 2007 at 05:08 am
July 3rd, 2007 at 05:42 am 1183441350
July 3rd, 2007 at 06:22 am 1183443727
An easier, maybe more methodical, way is to get a Treasury Direct account online, then convert your paper bonds electronically, then redeem them. It does take awhile (4 weeks or so) but in the meantime you can research T-bills, TIPS, figure out how to move your redeemed bonds to Vanguard, etc. Remember that as you increase your returns you increase your risk.
The other thing is that the bonds themselves were tax advantaged and if they are to be used for tuition they are not taxed.
July 3rd, 2007 at 01:13 pm 1183468398
July 3rd, 2007 at 01:25 pm 1183469126
There are dividend reinvestment plans out there or sharebuilder accounts, each searchable through google. In the case of DRIPs, the fees are sometimes zero or $1 per trade. Sharebuilder is $4 I believe. The neat thing is that it encourages the parents (or child when they're old enough to understand) to want to continue to add money in increments as small as $50 and see the dividends reinvest in new shares. The only downside there is it's not diversified unless there are other holdings, so perhaps if gifting over a period of several years, do multiple DRIPs. Good conservative diverse holdings could be like GE, then XOM, then a banking stock, etc. Good luck, let us know what you decide!
Dan
July 3rd, 2007 at 01:59 pm 1183471153
July 3rd, 2007 at 03:06 pm 1183475195
July 3rd, 2007 at 03:32 pm 1183476733
For my nieces and nephews, I have always given my sister checks with a note "for the college fund." I left the choice of how to invest the money up to her. She is the momma, after all. She saved that money in a regular savings account, and then when the amount had grown a bit she set up an ESA or 529 and invested it in mutual funds of her choice.
July 3rd, 2007 at 04:27 pm 1183480068
July 3rd, 2007 at 04:34 pm 1183480496
July 3rd, 2007 at 06:12 pm 1183486376
Geez.
July 4th, 2007 at 02:11 am 1183515096
You definitely did the right thing!!!!
July 4th, 2007 at 04:22 am 1183522947
July 4th, 2007 at 11:17 am 1183547852
July 4th, 2007 at 02:20 pm 1183558802
July 5th, 2007 at 09:29 am 1183627772
July 6th, 2007 at 05:22 pm 1183742556
July 9th, 2007 at 01:27 am 1183944435
Dan at everydayfinance.
July 31st, 2007 at 07:38 pm 1185910686
Free Credit Repair Forum
March 31st, 2008 at 10:47 pm 1207003657
April 1st, 2008 at 02:21 am 1207016519
April 2nd, 2008 at 01:38 am 1207100327
It's also funny to read your comments that are somewhat shortsighted and opportunistic. I could very well have come in today and posted what a genius I am for being in the market because the major US indices were up over 3% in a single day...about what these bonds earn in an entire year! I don't though because the market is volatile and it would be disingenuous to only highlight the brief wins and ignore the losses vice versa. The point is, nobody can time the market exactly, but the likelihood of stocks beating bonds over any long time horizon is virtually assured. Why would you go against the most appropriate allocation by virtually all measures?
No financial professional (Disclosure: I am not one) in their right mind would endorse a government bond for a 15-17 year time horizon. So, I'd just say, in 7 years when the investment has doubled and the return on the bonds would be half that, I'll still sleep well at night knowing I gave my kids the best risk-adjusted returns for their education.
April 7th, 2010 at 09:18 pm 1270675109
August 31st, 2010 at 03:32 am 1283225537
December 15th, 2011 at 10:02 am 1323943359