Thursday, June 10, 2010

Why we hate savings bonds


Editor's note: We field questions here from readers from time to time. Please post your question in the comments section. We'd love to hear from you.

QUESTION: I usually buy my grandchildren savings bonds to help them save for their education. My son has asked me to instead give him money to put in their 529 plan. He’s concerned about losing the savings bonds, and said they don’t get a good return. Is he right? Do I have any other alternatives?

ANSWER FROM DAN DANFORD: You picked the wrong guy to ask. I HATE savings bonds. They are awkward to buy, store, cash, and - as your son notes - find when you need them! Some of my worst horror stories as an advisor involve boxes of savings bonds left behind by ancient relatives! In my parent's day, savings bonds were one of the few places to set aside money each month. Now, they are an anachronism from a distant era and I absolutely loathe them as investments! Do I need to be clearer?

529 plans are the right choice for education savings today. You can choose between multiple investments, ranging from conservative bond funds to aggressive stock funds. Depending on your grandchildren's age, I often recommend a more aggressive approach. After all, five years is the usual benchmark we use for investing; if the money won't be spent in five years or less, then stocks usually provide a better returns. Even as your child or grandchild nears college, some of the money likely won't be spent until their college senior year. If people error, it's usually by being too conservative.

Seriously, savings bonds are rarely a good choice today. There are hundreds of options for investing that weren't around when my parents were young. Time to update your investment awareness!

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