Bonus Bonds are for suckers
It’s supposed to be the ‘fun’ investment, but the reality is low returns, erosion by inflation, and high administration fees.
BONUS Bonds are a bit of an institution. They’ve been around since 1970, dreamed up by the Government in an attempt to get us to save more.
When bureaucrats get bright ideas about what the common folk should do with their hard-earned cash, alarm bells ought to ring. And yet, almost half a century later, more than a million New Zealanders have collectively poured $3 billion in savings into Bonus Bonds.
The allure is obvious; every month, some lucky punter becomes a newly minted millionaire. As always, the devil’s in the detail. If you hold $20 worth of bonds, which is the minimum entry point, you’ve got one shot in 150 million of cracking the big one. That’s a chance so slim that it’s almost indistinguishable from zero.
There are thousands of smaller prizes dished out every month too, but winning anything at all is a long shot. According to the Bonus Bonds website, the current odds are about one in 20,000-35,000. Let’s be generous and say you hold $1000 worth of bonds, giving you 1000 entries in the draw. Even then you’d only hope to win a prize every two or three years.
The danger is that you could get nothing at all. Every year you don’t win, inflation eats away at the value of your ‘investment’. While inflation is weak at the moment, it’s averaged around 2.7 per cent in recent years, and climbed much higher in the past.
That means the prizes on offer need to be juicy enough to compensate for the ravages of inflation and the lack of interest income. According to the Bonus Bonds sales pitch, ‘‘you have the potential to accelerate your investment returns beyond what you could expect with other investment options’’.
This sounds exciting at face value, but it’s carefully weaselworded. The actual returns the unit trust earns and dishes out are underwhelming, to put it mildly. Over the past five years, it’s ranged from 1.86 per cent to 2.69 per cent, after tax, fees and expenses.
Compare that to savings accounts paying a guaranteed 2.9 per cent, or short-term deposits with returns of 3.2 per cent or more. Any winnings you receive from Bonus Bonds are tax-free, which could help close the gap in some circumstances. But if you’re investing for the long term, there are several options with similar tax advantages that are likely to earn much higher returns.
ANZ took over the Bonus Bonds scheme in 1990. Part of the reason the returns are so lacklustre is that it takes a big chunk in management fees; more than 1.15 per cent each year. Rather than getting mad at the bankers, we should follow their lead. They don’t care about fun or surprises, but about cultivating a steady stream of income.
Bonus Bonds advertises itself as ‘‘the much more fun investment’’. But if investing is 123rf fun, you’re doing it wrong. As a Nobel Prize-winning economist noted, it should really be as exciting as watching paint dry.
About the nicest thing you could say about Bonus Bonds is that they make more sense than playing Lotto. Just don’t kid yourself that you’re making a real investment – fun or otherwise. Got a money question you’ve been struggling with? Want to send a bouquet or a brickbat? Email Budget Buster at meadows182@gmail.com, or hit him up on Twitter at @MeadowsRichard.