Invest Like A Grandmother

My Grandmother, or “Nonnie” as we called her, was born the same year the Wright Brothers first achieved flight.  She passed in 1994 at the ripe age of 91, and having experienced the 1900’s almost in their entirety, she saw a lot.  Starting with the birth of flight, and finishing with the world wide web.

She lived a pretty tough life.  She got divorced in the 30’s when that sort of thing was taboo.   Then she had to raise her child, my Mom, through the Great Depression, World War II, and beyond.  On her own.

On top of it, she was a Rosie The Riveter for a short period in World War II.  She worked at the Martin Aircraft Plant in Baltimore helping assemble B-26 Marauder Bombers for the war effort.

Total badass.

My family were pretty average.  We were blue-collar, and lower middle class.  We got by, but mostly paycheck to paycheck.

Back in the 70’s when I unceremoniously entered the world, investing in stocks was not something “regular folk” did.  It was the realm of the wealthy, or at least the connected.  Sure, anyone was allowed to and able to buy stocks just like today.  But with no internet, no financial news channel on TV, and minimal information, it was just not something that the average person knew much about.

So my grandmother, like the rest of my family, kept any extra money in a savings account at the local bank.  That’s what you did back then.  Interest rates actually paid 4 or 5% sometimes so it was a better choice than it is today by far.

Any kind of investment outside of getting interest from the local bank was seen as something special.  Worthy of a gift.

 

A Belated Gift

Fast forward to spring of 2017 and I’m finally moving my Mother out of the house in Baltimore City that I grew up in.  The area was never great to begin with, but over the last 20 years it had degraded into a full fledged ghetto.  It was just not safe.  It was long past time to go.

While we were cleaning out almost 50 years of memories, my Mom came across a box with US Treasury Bonds.  They were from my Nonnie, and for me.

What an unexpected gift!  Nonnie had been gone for 23 years and when she died all she had to leave me at the time in 1994 was $1000 which I was more than grateful for.  She didn’t have anything else.

But it turns out that she had been buying me Treasury Bonds two or three times a year throughout my early childhood.  And they got stashed away.

 

 

I can’t tell you how ecstatic I was to have this gift from my long-deceased Grandmother!  I immediately did an inventory of the bonds and went right to the Treasury Direct website.

After plugging them all in, I realized this delayed gift from my Nonnie was $2815!  Sweet!!

Needless to say I was delighted.  How many people find out they have almost 3 grand waiting in gifts from a grandparent who died over 20 years ago?

 

Hatching & Counting My Chickens

I had 22 total bonds that my Nonnie purchased for a total of $425.  They were all Series E.  And as mentioned the value with interest wound up being $2815, so that’s a total of $2390 in interest.

However, Treasury Bonds stop accumulating interest after 30 years, and all of my gifted bonds were older than that.  So at this point they were the same as cash.  And depending on when they stopped earning interest they were now worth less than they were at that date since inflation has been eroding them.

Not my Nonnie’s fault.  And not my Mom’s fault either really.  Neither of them knew this factoid, that these bonds stopped earning interest after 30 years.  It’s just knowledge that wasn’t easily available back then.

How did the bonds perform?  One bond was purchased in June 1978, for $18.75.  After 30 years it stopped earning interest and was valued at $106.94.

So the annual rate of return was 5.98%, close enough that we can just say 6%.  Hmmmm, an annual six percent return for 30 years isn’t bad, you might be saying!

Indeed, not bad at all.  But that was 1978 – 2008.  Things are different now.  Big time.  Current US Treasury Series EE Bonds earn .1% annually.  And Series I Bonds are way better at 2.58%, but that’s still not a great return.

Turns out the bonds my Nonnie bought me lived through some years with very high yields.  Here’s a chart of treasury yields from 1960 – 2017.

 

 

Wow, what happened there in the early 1980’s!  Yeah, that peak is 15.32% in September of 1981.

15.32%!!!

In short, the Fed tried to kill the rampant inflation of the late 70’s by jacking up interest rates.  It worked, but they also launched the economy into a recession.  You can read a more detailed analysis here.

 

Playing It Safe

Here’s the thing about US Treasury Bonds.  They are 100% risk-free, guaranteed.  Backed by the “full faith and credit” of the United States Government.  They’ve been called “Armageddon Security”.  If there ever comes a time when Uncle Sam isn’t paying out on Treasury Bonds, don’t turn on the news.  You’ll likely be hearing about bad things.

But they’re the poster child of a conservative investment, an assured hedge against any loss of principal.  “Risk free” only means you won’t lose your principal or the interest you’ve accrued to date like you can with stocks.  But you carry the risk of inflation and of course changes in the interest rate. 

For many years, Treasury Bonds paid pretty decently as you can see in the chart above, hovering in the 7 – 8% range even into the mid 1990’s.  But inflation was also way higher then.

To be honest, unless you’re close to traditional retirement age or you have some clairvoyant knowledge of a coming 25 year bear market that we don’t know about, US Treasury Bonds are just not a great investment right now.

If you do want something super conservative in your portfolio it might be better to invest in the Vanguard Total Bond Market Index Fund to satisfy the bond portion of your diversification strategy.  The risk of that fund is a little higher (in the relative world of bond risk), but the returns are likely to be as well.

If you do choose to put US Treasury Bonds in your portfolio, you don’t have to buy individual bonds like in the days of yore.  You can buy The Vanguard Long-Term Government Bond Index fund, which of course has super low fees like most Vanguard products.

 

They Didn’t Know What They Didn’t Know

To play devil’s advocate, had my Nonnie put that $18.75 in an S&P stock fund in 1978 (Vanguard’s S&P Index Fund did exist then), by June 2008 it would have been worth about $261.  An annualized return of 9.13%.  With dividends reinvested it would have grown to $463.

That would have been great, but again, it was an unknown thing to my family.  I mean, we ate hot dogs twice a week for dinner.  We didn’t know what stocks were.

I look at it this way, my Nonnie’s generous gifts earned around a 6% return, and they were mostly risk free.  She pulled that off while not knowing anything about investing.  Was it luck?

Nahhh…. she was just a badass.