I recently cashed in some savings bonds that my grandparents bought me when I was born. They were purchased in 1985 for a total of $100. They came due in 2015 and were worth $460, so nominally it grew 460%. That $100 in 1985 is worth about $220 today, so in real terms (adjusted for inflation) the investment a little more than doubled; not great for 30 years. That same $100 invested in 1985 in a S&P 500 index fund would be worth about $2,200 nominally in 2015 and $940 in real terms. So what's the point?
- Compound interest makes a slightly higher rate of return (or fee) a big deal. Doubling the rate of return (5.2% on the bonds, 9.8% on the index) in my example is the difference between having $460 or $2,200 after 30 years.
- Diversified risky assets like a total stock market index fund are, in a sense, a safer investment when held for sufficiently long periods of time. Bonds may deliver less volatility, but you're exchanging volatility for returns.
- Investment choices for regular people has changed a lot in three decades. Savings bonds don't command the rates they once did, and index funds are now cheap and plentiful. Granted, a savings bond is straight forward. Today you'd have to use a UGMA/UTMA or 529 to buy an index fund and transfer the money to a kid.