As if the tax-free income isn’t enough of a reason, here are 2 more reasons that Tax-Free municipal bonds may become even more attractive in the future.
1. Tax rates are going up [probably]
Tax-free muni bonds have always been an attractive investment for their combination of high quality, low default rates, and Taxable Equivalent Yields (TEY). The TEY represents the amount of yield you need before taxes to realize the equivalent income of a tax-free. The TEY goes up as your tax bracket increases making tax free income more powerful if you are in a high tax bracket. The greater your tax bracket is, the more interest you keep when compared to a taxable investment.
Therefore if tax rates go up, after tax yields shown above will be going down Continue reading
Several years ago the most desirable municipal bonds were AAA and insured. In today’s muni-bond market, insurance ain’t what it was. Many bond insurers are no longer reliable, and you need to know the quality of your bonds.
Here’s how bond insurance used to work:
Municipal bonds are issued by state and local authorities, many of which have average credit, at best. In lieu of paying higher interest rates, there are Bond Insurance companies that allowed a municipality to ‘purchase’ their AAA rating in return for a fee, which is much cheaper over the long run than paying a higher interest rate to investors. Thus, an A-rated municipality could buy insurance and issue bonds at coveted AAA-rated interest rates.
Unfortunately, these insurance companies got greedy, and started looking for more and more of those lucrative fees. They began insuring Mortgage backed bonds as well, many of which were AAA rated by the rating authorities. Now the same mortgage bonds are known as ‘toxic’ investments, and the insurers obligations are beyond anyone’s comprehension.
What this means for your Muni bonds:
Your bonds are only as good as the municipality’s underlying credit quality- their own ability to pay back your bond. This often depends on the Continue reading
The media is selling entertainment. Keep that in mind when doing your own investment research. You have to be able to distinguish between the information that is news and the cheerleading/fear-mongering that is passed off as advice. Remember, readership and viewing statistics are the only thing paying the bills at these companies. They just want your eyeballs.
Here are 3 of the most prolific current myths you should ignore.
Asset allocation is broken (click here for a brief explanation of AA)
REALITY: In 2008 every single asset class except for US Treasuries got crushed. It is only normal to question a strategy designed to reduce risk when it fails to adequately protect the downside. Asset Allocation is and will continue to be the smartest approach to investing. We stick by the philosophy, and will always own the top performing asset class, both today and tomorrow. Before you bail on Asset Allocation, question the alternatives also:
- Market Timing- an impossible task to do consistently. If you were ‘smart’ enough to sell in September 07, you need to be correct again and buy back in March 09.
- Stock Picking- extremely research intense, and also impossible to do consistently.