The other day when I was at the dog park I was approached by an individual who had some questions regarding U.S. Savings Bonds. The gentleman wanted my thoughts on using U.S. Savings Bonds to save for his granddaughter’s college education. He just had his very first grandchild and he wanted to do something for her future education. As he said to me, he doesn’t like the stock market and he wanted something safe and secure for his granddaughter. I thought you would be interested in my answer.
I told the gentleman that when he was talking about safety and security he was really only referring to principal fluctuation. Principal fluctuation is just one risk that investors have. What I explained to him is that there is another risk and particularly in his situation it is a risk that he needs to be concerned with even more than principal fluctuation. The risk I’m referring to is purchasing power risk.
We all know that a dollar today isn’t worth the same amount that a dollar was 20 years ago. Think back what you paid for a car 20 years ago and compare that to what a car costs today. We all know that because of inflation and other things, cars are much more expensive today. That is why long-term investors need to be more concerned with purchasing power risk than the risk that the principal of their investment will fluctuate up and down. I bring this up because the gentleman I was speaking to, had a goal for his money, and that was to help his granddaughter through college. Unfortunately, investing in U.S. Savings Bonds is not going to keep up with the increased cost of college. Therefore, investing in U.S. Savings Bonds may be a patriotic investment; but it is not a good financial investment when you’re saving for college.
In purchasing U.S. Savings Bonds it is important to understand what rate of return you are going to receive. Through the years, U.S. Savings Bonds have changed. They’ve gone from a fixed rate of return to variable rates of return and back to fixed rates of return. Currently, if you buy a U.S. Savings Bond your rate of return is .1 percent. That is the rate you receive for the term of the bond. I think one thing we can all agree on is that college costs are going up much more than .1 percent. Therefore, as I explained to the gentleman, every year the money is in a U.S. Savings Bond it is actually losing purchasing power year after year. Therefore, the $1,000 he was going to invest for his granddaughter’s college education may be worth more on paper 18 years down the road, as it would not have kept up with the increased cost of college and would buy less than it would today. In other words, its purchasing power would continue to erode over time.
What I told the gentleman is that because he was a long-term investor for his grandchild’s college education, U.S. Savings Bonds were not the safe way of going. They are guaranteed not to keep up with the increase of college costs. What I told the gentleman is that despite not liking the stock market it actually did give him his best chance of having the money grow for his grandchild’s college education. What I recommended to him is that he considers the Michigan Education Savings Plan (www.misaves.com). Even though this is a stock market investment it would be diversified and I have no doubt that 18 years down the road an investment in the Michigan Education Savings Plan would be worth substantially more than U.S. Savings Bonds.
I remember a time when U.S. Savings Bonds paid nine percent. Those days are long gone and they’re not coming back anytime soon. Like all investments, they should be judged by their return, and when you look at U.S. Savings Bonds the returns are not so good.
If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.