Savings Bonds: Not Patriotic
This 1995 article originally appeared in the Wichita Woman, the publication of 100 Plus of Wichita Falls.
Here's an offer I have for you. You can purchase a zero-coupon bond that pays 85% of the average yield on 6-month T-bills for the first five years you hold it. After five years, the return jumps to 85% of the 5-year Treasury rate adjusted semi-annually. You can't get out of this bond for at least six months and when you do, the return is not credited in-between interest dates. So, if you redeem 2 days before that semi-annual date, you have missed out on six months of interest. They can't even be used as collateral for a loan. These bonds, by the way, are held for an average of ten years, even though they pay short-term rates for long-term investment.
This sounds like a poor investment, especially for long-term investing like retirement or saving for that new-born's college education. Yet the investment I've just described is one of the most popular investments in America. In many places of work, it is a sign of a lack of patriotism to not invest in it. They are U.S. Series EE Savings Bonds.
To be fair, Series EE bonds do offer some unique advantages. First, unlike other zero coupon government debt, no taxes are due on the accrued interest until the bonds are redeemed. Second, under certain circumstances the interest on the bonds may be completely tax free if used for educational expenses. Third, they are direct obligations of the U.S. government so they offer rock solid security of principal.
What troubles me is that most people I know who are investing in EE Bonds are doing so for the long term--and EE Bonds are lousy long term investments. There are some situations that call for them, but not many. The other problem I have with them is that it goes against what has made this country great...the ability of us to look past risk and toward the goals that we are trying to achieve.
When people came here they did not think that life was going to be a bed of roses. They knew that hard work, turmoil, and perhaps death awaited them. But they did it to make this land a proper home for future generations. Our rights to freedom, religion, voting, and speech were not won by those enjoying a status quo existence, but by those who were willing to lay down their lives for what we now enjoy. Our agricultural, industrial, and now computer revolutions did not begin and flourish by those who took the safe easy road. It flourished by people taking the tough, rocky road through experimentation, exploration, risks, and hard work that led to success.
So what does this have to do with the simple piece of paper that is an EE Bond? Because investing in it means taking the sure, easy road to mediocrity. It means that you wish to avoid any trouble along the way to ensure a steady, if low, return on your investment. It means that you want to ignore the fact that owning a business is much more valuable than being owed money by it.
Continue doing the easy thing or take a bit of risk. Put in the time and effort to learn about investments, investing, and financial planning as a whole. Quiz your advisors to make sure they are doing the same. Then pass on a legacy to your future generations. A legacy that ensures they understand that to have the rewards you have to face the risks also.