Sunday, December 27, 2020

Savings Bonds and the Financial Press

Savings bonds are not a particularly good investment right now.  Advice from the financial press isn't a very good investment, either.

Years ago, I wrote a blog entry about Treasury Direct - the US Government website that allows you to buy savings bonds and even treasury bills, directly from the government.   In the old days, we had the "Payroll Savings Plan" at work, and like with United Way Campaigns, the "new guy" was usually drafted into going around and soliciting people to sign up for this.  And as "new guy" at General Motors, United Technologies, and the Patent Office, I did this again and again.

The idea was simple - you signed up to have a small amount of money taken out of your paycheck every week, and it would go toward buying a savings bond.   Depending how much you took out, you would accumulate a savings bond every month or so, and build up a "nest egg" of after-tax savings.  This was in the era before the IRA and 401(k) became popular.

It was a painless way to build up savings, as the money came out of your paycheck before you would "see" it, and thus you would not be tempted to spend it - and us plebes love to spend it, don't we?  But of course, in the ensuing years, the 401(k) replaced pension plans, and putting $25 a week in a savings bond made less sense compared to putting it in your 401(k) tax-free, often with matching funds from your employer.

The interest rate on savings bonds back then was a few percentage points - like 5% or so.  Sounds like a lot, today, but bear in mind back then, inflation was running 10% or more and a mortgage rate could be as high as 14%.  So it was a low-yield investment, if not a safe investment.  Today, interest rates across the board are low - but oddly enough, not lending rates, for many people - and savings bonds are paying a tenth of a percent in interest.   It may be a "painless" way to accumulate money in savings, but it isn't a way to make money and perhaps never was, as the interest never outpaces inflation.

Today, the "payroll savings plan" is no more, and the government no longer runs ads exhorting us to "join the payroll savings plan, where you work" which is a phrase we heard so often as a kid, that we could repeat it along with the entire text of "ancient Chinese secret!" (Calgon).   You can now buy savings bonds and treasury bills online at Treasury Direct, which is a very well run, if not a little clunky, government site.  It does have pretty good security, using a virtual keyboard to log in.  With the click of a mouse, you can buy or redeem savings bonds or treasury bills, transferring money to and from your bank account within a day or two.  The site is well-designed and well-run.  One caveat: You can't use the "back page" icon on your browser.  For security reasons, they only allow navigation within the site using the internal site link icons.   A small price to pay.

I had a few thousand dollars squirreled away in savings bonds, as well as a treasury bill through Treasury Direct.  Some of the older bonds are paying maybe 3% or so.  But some of the newer bonds are paying like 0.10% and I realized it would be better to sell those off and put the money into a money market account that was at least earning a few percentage points in interest.  So I did.

Once you retire, it is time to start digging up those acorns you squirreled away and eating them - or at least consolidating them.  I realized it would be a hassle to deal with so many accounts as we got older - or if I died - so I have been closing out some of the smaller accounts.  Besides, many financial houses offer bonuses if you deposit money - and not small bonuses either.  So, over the next few years, I will be winding down my savings bonds and probably sell off the T-bill over time.

What got me started on this was a recent article in the financial section about savings bonds.  It was a complete fluff piece - almost something from an overseas text farm.  It went on for paragraph after paragraph without actually saying anything of consequence.  For example, that bond rates right now are a joke, and there is little point in buying a savings bond - other than as a means of forced savings.  The article doesn't contain any false information - but it would put you to sleep with its bland recitation of how savings bonds work.  Nowhere in the article is any exhortation that perhaps this is not a good place to invest right about now.  Savings bond rates are in the toilet, and t-bills are not far behind.  Hell, they even offer something called a "0% C of I" which is basically a way of saving up money to buy a larger product (e.g., t-bill).  These really aren't good "investments" right now, other than as a safe place to park money.

That is the conundrum these days.  With "safe" investments paying next to nothing or even negative interest in some countries, people seek out greater rates of return - in equities (e.g., stocks), commodities (e.g, gold) or bonds (e.g., corporate debt).  All are paying better rates of return than 0.1% or have the potential to.  They also have the potential to pay less or even evaporate into nothing, leaving you with a -100% rate of return.  As I noted in a previous posting, I liquidated my stocks and mutual funds about a year ago, and left it all in cash - which we are spending.  Mark's portfolio I left in a panoply of mutual funds.  Since then, we've pretty much broken even - my cash portfolio keeping current with Mark's wildly fluctuating mutual funds - which went down over 50% in March and have recovered since then. Being five years younger, he can afford to gamble more - or more precisely, we can both afford to gamble with his portfolio, while keeping enough money in cash and low-interest accounts to fund our retirement for a decade or so.

There is little incentive for me to get into savings bonds at this point.   As a "forced savings plan" the payroll savings idea was sound - money you don't see, you don't spend.   At a point in my life where I needed financial discipline, it was a way of squirreling away money - which we did using a number of techniques - putting money into a credit union account in another State, buying individual shares of stock through shareholder investment plans, such as Compushare or through The Money Paper.

But of course, the biggest and best "investment plan" was the 401(k) offered where we worked, which back then, even matched funds, at least for the first few percent of contributions.  Tax-deferred and taken directly from your paycheck, you never had to worry about bouncing a check as a result.   Back in the days when I was wildly undisciplined, financially, if I had money taken from my checking account, rather than from my paycheck, it could result in a bounced check down the road.

Then again, you can get into trouble with a 401(k).  I mentioned before a friend of mine who decided to contribute the max to her 401(k) plan because we told her than saving for retirement was a good thing.  Unfortunately, the 15% she was putting in the plan wasn't matched by a 15% cut to her monthly spending, and pretty soon, she was sucking air at the end of the month.  So she put more and more purchases on the credit card, which did not get paid off, and the interest payments at 22% compounded things, until she missed payments and the penalty rate of 30% kicked in - and then she borrowed against the 401(k) to pay off the credit card.  Do people do stupid things like this?  You betcha.  Hell, I did pretty stupid things, too!

The problem with the financial press is that they put out articles like this one about savings bonds that really don't say much.  In the greater scheme of things, this particular article is not very harmful, just bland and not very useful.  Worse yet are the articles hyping IPOs and trendy investments.  Every week, it seems, we are told about how great some new tech toy is, and how some tech titan is going to change the world.  You may be forgiven for thinking that all investments in the stock market involve technology stocks or some new widget or gizmo.

Again, the problem with the media isn't them, it's us.  We click on this nonsense and we like sensationalism, so they sell it to us.   We click on stories about the market tanking or a stock price skyrocketing - because that is something interesting happening.  We don't click on stories about a stock that has steadily climbed in value over a decade and pays dividends regularly because that's boring.  But finances are boring - stultifyingly boring.  Or they should be.  If your investments are exciting, chances are, you're doing it all wrong.  You don't get a do-over on this in life.  It is a one-shot deal.

The other problem with the financial press is they sell us the idea that a Billion dollars isn't a lot of money - a thousand million, or enough money to keep a thousand people well-off for the rest of their lives.  This feeds the idea that saving up money over time and careful investing is for chumps.  It's Billionaire or Bust!  And as a result, a lot of people go bust, often giving away their money to Billionaires in the process.

I have noted before that the fundamental flaw with the IRA and 401(k) model which replaced the "Defined Benefit Pension" model before it, is that it made us all into investors, regardless of whether we wanted to be one or not, and regardless of our level of skill, expertise, or native intelligence.  It is a system ripe for fraud and manipulation.   We know oldsters who hand over all their money to "the nice man" at the storefront investment chain (and you know which one I am talking about - they are in every strip mall near middle-class communities).   He is a nice man, and he doesn't steal their money, but on the other hand, they don't realize how much of their money goes to him, as his fees and charges are not really itemized in their monthly statement - they never are, even from the "big" low-fee investment houses.  And if you ask, directly, you will be given a lot of vague hand-waving answers.  I've asked.

But beyond that are the absolute rip-offs and con-jobs - investment "advisors" who churn accounts down to nothing to earn trading fees, or who put oldsters into annuities that don't pay out until age 80 or so - leaving people destitute.  Or helpful "structured settlement" places that will hand out a wad of cash in exchange for an insurance payout or even pension plan payments - often pitched at people in the early stages of dementia.  And don't get me started on Reverse Mortgages!

But these hyped stocks, gold, bitcoin, margin trading, and other sketchy investments are even worse, as they are pitched at people who haven't lost their minds and should know better and the financial press talks about them in such sunny tones as to make it seem like a kicky fun thing do with a few thousand of your hard-earned cash.

And that, in short, is why I started this blog.  Not to save others, but to save myself.  I never bought into the Kool-Aid of the dot-com startup or the IPO - I could smell something was wrong there from the get-go, being inside the sausage factory when it was going on.  Learning about this stuff is hard and then again, it is pretty easy.  Trying to "research" on the Internet will only steer you to weirder and weirder things - before long, you will be invested in gold and Qanon, which are basically the same thing.

What I found out, after years of beating my head against the wall, is that a lot of the old philosophies of our ancestors are still true today, despite "sea changes" and "new paradigms" telling us "profits are a thing of the past!"  "If it sounds too good to be true, it probably is!" is as true today as it was in my Grandfather's time.  And my parents' distrust of anything too heavily hyped or too slick turns out to be well justified.  You can spot a con-job from 100 paces, once you know what to look for.

I don't have to sit down and crank the numbers on buying gold or bitcoin or margin-trading on Robin Hood.  All I need to do is look at the sort of shady people pushing these things online, and the cheerful, chirpy articles talking about how fun and profitable these things are, to know they are a raw deal.  It is like MLM marketing scams - just the way they are presented should tell you volumes.

But some people never see this - again, a failure of our capitalist system, which allows the clever to exploit the dense and weak.  I wish it weren't so, but there it is, and perhaps it has always been this way, back to the dawn of time, when Og the caveman sold shares in his new square-wheel corporation which was going to revolutionize the rotational wheel industry.  I wonder how many people lost their life savings over that?

I digress, but not by much.  It seems every decade we go though this cycle of unbridled enthusiasm for everything that comes down the pike - as a new generation comes of age and starts to make a buck or two and thinks, "you know, I need to invest this money and make some big bucks!  And I bet I can beat the market by finding the next big thing to invest in!"

It's painful to watch, but I have a feeling, here we go again....