The return on bonus bonds

By MARY HOLM

Q: I wonder if Bonus Bonds should be treated as a medium to long-term investment, e.g. three to five years?

I invested $100,450 in January 1997 as part of a diversified financial plan.

We receive a prize every month. During the past five years we received a $5000 prize two months in a row.

My Quicken programme reports the following returns on our investment: Last year's return, 11.5 per cent; last two years' average return, 7.1 per cent; last five years' average return, 6.7 per cent.

Not a bad low-risk, tax-paid return.

Indeed not. But the fact is you've been lucky.

For those who haven't been reading this column lately, Bonus Bonds pay no interest. Prizes are awarded every month, ranging from $20 to $300,000.

The Bonus Bond Centre says the average return from the prizes is 3.4 per cent. So for everyone like you who has done better than that, there must be someone who has done worse.

Investing in Bonus Bonds is rather like investing in shares in just one company.

Lots of people do that, perhaps because they inherited the shares, or they were given them in a demutualisation or power company giveaway, or they work for or are familiar with the company.

Some do really well, others do badly.

One difference between single shares and Bonus Bonds is that the more you've got in the bonds, the less likely your returns will be extremely high or low. That's not true of investing in a single share.

The fact remains, though, that Bonus Bond returns are volatile. As your figures show, in some years you'll do better than in others. Next year you might do abysmally.

Because most people prefer to know where they stand, the market generally has to pay higher average returns on volatile investments or nobody would buy them.

The 3.4 per cent average return on Bonus Bonds - even though it isn't taxed - is not that good for a volatile investment.

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