By Dr. Jim Dahle, WCI FounderOccasionally, I hear an investor say they invest in individual municipal bonds to get a higher return than they would get by using a high-quality municipal bond fund. There's a good chance they're mistaken due to ignorance of how the municipal bond market works. Even if they aren't, it probably still isn't a good idea. Let's explore why.
What Are Municipal Bonds?
Before we get into our subject today, let's provide a little background context. At its most basic, a bond is a loan to an entity. Treasury bonds are loans to the federal government. Corporate bonds are a loan to a corporation. Mortgage bonds are loans to individuals with their house as collateral. Municipal bonds are loans to state and local governments. Each of these bonds performs slightly differently, and they're taxed differently. Corporate and mortgage bonds are fully taxable. Treasury bonds are state and local tax-free. Municipal bonds are federal tax-free, and if the bond is in the state of your residence, it's also state tax-free. Due to their tax-free nature, municipal bonds are purchased by high tax bracket investors because their after-tax return is higher than that of the other types of bonds, despite the pre-tax yield being lower.
What Is a Bond Fund?
A bond fund is a mutual fund that buys bonds. Mutual funds are a group of investors that band together to hire a professional manager and share costs. A mutual fund provides professional management, extensive diversification, daily liquidity, and lower costs—all in exchange for a fee to the manager known as the expense ratio (ER). The best bond funds, such as those available from Vanguard, are very passive and very low cost. A typical expense ratio for these funds is 0.10%. So, it costs you $10 per $10,000 invested per year. That means all those benefits of using a fund are essentially free.
More information here:
The Nuts and Bolts of Investing
Why I Hate Total Bond Market Index Funds
What Is the Problem with Bond Funds?
If bond funds are so awesome, why would anyone want to avoid using them and invest in individual bonds? There is just one problem with a good bond fund. Unlike investing in individual high quality bonds, the investor in a bond fund is not guaranteed to never lose principal. If you hold a bond until its maturity, you will get all of your principal back (at least nominally, i.e. before inflation) so long as the bond does not default. In a bond fund, it's possible to lose principal, even if none of the bonds default.
This generally occurs in times of continually rising interest rates. As interest rates rise, previously owned bonds with now submarket rates are worth less. Since a bond fund tends to buy bonds of a certain age and then sell them as they age out of the target range of the fund, it's possible they can buy bonds, watch them depreciate due to rising rates, and then sell them. Buy high, sell low. Not a winning strategy. Of course, as rates fall, just the opposite occurs. Previously owned bonds become more valuable, and the bond fund comes out ahead. Over the long run, these two occurrences tend to cancel each other out for the long-term investor. In fact, rising interest rates are actually good for long-term investors, so long as they are investing for a period longer than the duration of the bond.
But some bond investors don't like the possibility of losing principal and convince themselves that they should invest in individual bonds despite the advantages of a bond fund.
More information here:
VWIUX vs. FMBIX: Which Bond Fund Is Best?
“But I Can Get a Higher Yield with Individual Bonds!”
Individual bond advocates sometimes say they can get a higher yield with individual bonds than they can get with a bond fund. Maybe. Maybe not. Let's explore seven reasons why this thinking is a mistake.
#1 Looking at the Wrong Yield
Sometimes investors are looking at the coupon yield instead of the yield to maturity. This occurs when they buy a “premium bond.” A premium bond is a bond that you pay extra for because it offers a higher yield than new bonds being issued. Instead of paying $100 for the bond, you may be paying $125. Once you adjust the yield for the higher price you are paying, it is equivalent to the yields being offered on new issues. You really need to know what you're doing when you buy individual bonds. If you want to play bond fund manager in your spare time, you need to at least have a rudimentary knowledge of how the bond marketplace works.
The yield you care about is the Yield to Maturity, i.e. what yield are you going to achieve if you pay the current price for the bond and hold it until it matures, assuming that it does not default. With some bonds that allow the borrower to pay the loan back early (a callable bond), you need to look at the “Yield to Worst,” which is like the Yield to Maturity adjusted for what happens if they pay it off early. Only rarely should you care about the coupon yield, which is what its yield to maturity was on the day it was issued.
Here is a screenshot from Fidelity's brokerage site. If you don't know what every term on this page means, you have no business buying individual bonds. Listed here are three bonds. In the first column, you decide if you want to buy or sell. The second column tells you the state in which the muni bond was issued. The next column is a description of the bond, i.e. who issued it, when it was issued, what the coupon on the bond is, and when it matures. In this case, the first listed bond was issued by the government of Alabaster, Alabama, as a “general obligation bond” in 2020, and it matures in January 2033. The fourth column is the coupon, and the fifth column lists the maturity date. The sixth column is the next opportunity for Alabaster to call the bond. The seventh through tenth columns are ratings for the bonds and the bond issuer by Moody's and S&P, the two most prominent bond rating agencies.
The next five columns are the bid (what someone is willing to pay for the bond if you'll sell them one) and the ask (how much someone is willing to sell the bond to you). There is a spread between these two prices and for most municipal bonds—a very large spread. Note that the Yield to Worst (or Yield to Sink) is significantly lower than the Yield to Maturity in this callable bond. If it gets called in 2030 instead of paying interest until 2033, it will have a yield that is 0.314% lower. Depth of book is a rating of liquidity. The next column shows the most recent price at which it traded (which could be weeks ago; these aren't stocks). The last column talks about attributes of the bonds such as ME (material events), SFP (sinking fund protection), and GO (general obligation)
My point is that you shouldn't consider this a 4% bond. You should consider it a 2.8% bond, and naive investors may not.
#2 Not Considering Default Risk
Another mistake bond investors make is only looking at the yield. They may see a muni bond yielding 4% and then look at Vanguard's muni fund and see that it only yields 3.5%, and then they go buy the individual bond without ever looking under the hood. Perhaps that individual bond is rated A+. That sounds good, right? Maybe in school, but on the S&P bond rating scale, it's the fifth category from the top. The average grade of the bonds in the Vanguard Intermediate Municipal Bond Fund is two grades higher. You shouldn't be surprised to see that you can get a higher yield if you're willing to take on more default risk.
#3 Not Considering Term Risk
How about a bond with a maturity of 15 years? Should that bond have a higher yield or a lower yield than a muni bond fund with an average maturity of eight years? Higher. That's no free lunch; you're getting paid more because you're taking on more term risk. Compare apples to apples. Compare a bond fund with an average maturity of 15 years to an individual bond with a maturity of 15 years. (Or better yet, use duration.)
#4 Not Accounting for Illiquidity
People who have traded stocks and/or ETFs are used to a very high degree of liquidity in the markets. The individual bond markets are not nearly as liquid. Every bond is a different security, even if issued by the same company or government entity. Some of them trade incredibly rarely, not multiple times a second like in the stock market. They might not even trade every month. Consider this bond:
This screenshot was taken on January 19, 2023. This bond had not traded at all in the prior month, and even then, it was just a few bonds ($500). Before that? Two months prior, and that was only $3,000. Imagine you want to unload 500 ($50,000) of these. Imagine what kind of spread or commission you are going to have to pay a bond dealer to take those off your hands. Essentially, if you have to sell muni bonds before maturity, you are going to do so at fire sale prices. Now, that might be an opportunity for you if you can provide that liquidity to someone else, but keep in mind the fact that if you can't turn around and sell it easily for what you just bought it for, that makes it less valuable. You need to adjust for that.
#5 Not Accounting for the Value of Your Time
I already spend more time managing investments than I would like, given that my investments are spread over four 401(k)s, three Roth 401(k)s, a defined benefit plan, two Roth IRAs, four UTMAs, four custodial Roth IRAs, 38 529 college savings accounts, two brokerage accounts (one in a trust), a savings account, three TreasuryDirect accounts, an HSA, and a DAF. Mix in nine asset classes, and it's not exactly straightforward. Many other docs have similarly complex portfolios. Now you want to start picking individual securities? How exactly are you going to decide which individual munis to buy and which to pass on? Are you going to research local governments all over the country? How do you plan to do that? How much time will it take? What is the value of your time exactly?
As a doc, your time might be worth $250 an hour. If you spend an hour trying to decide whether to buy $10,000 of a given municipal bond and you end up eking out an extra 0.3% in yield for doing so, you haven't earned $30; you've lost $220. And if you want to pay a professional to do this for you, what are they going to charge? A 1% AUM? Now they have to get an extra 1% just to make up for their cost before they can start earning you anything. Don't you think you'd be better off paying a Vanguard bond fund manager a few basis points to do it for you?
Maybe you think you can just buy small lots (5-30 bonds) and make an extra high yield by providing liquidity and then holding to maturity. Now, imagine you have a $5 million portfolio, 20% of which is in muni bonds. If you're buying $500-$3,000 at a time, how many times will you need to buy muni bonds to get $1 million invested? Oh, about 500 times. Imagine the complexity and time you will spend dealing with those 500 bond lots. It's bananas for a doctor to spend their time doing this and think they're coming out ahead. Go do another surgery each year and just use a muni bond fund.
#6 Not Accounting for the Lack of Diversification
With Treasury bonds, it's fine to buy individual bonds. By purchasing new issues at auction, you avoid any bid-ask spreads, commissions, or expense ratios. Since all Treasuries are issued by the same entity, there is no additional diversification against default risk by using a fund. You're just getting convenience and liquidity. If you're willing to give those up, perhaps you can eke out a few more basis points of return and ensure you don't lose principal and that will be worth it to you. Laddering the bonds may reduce the consequences of the illiquidity (and even if you have to sell Treasuries, at least the spread is much smaller than with muni bonds).
But you want to do this with corporates or munis? Do you have any idea how many of these you will need to buy to get the same amount of diversification you can get in a good muni bond fund? My preferred Vanguard muni bond fund (VWITX, but I use VTEAX as a tax-loss harvesting partner) has more than 13,000 bonds in it. How many are you planning to buy? Eight? Twelve? Thirty? Even 500 isn't close to the same thing. Getting a higher yield? Maybe that's because you're taking on more risk.
#7 Not Thinking About the Spread
The spread (the difference between the bid and the ask prices) is a huge deal in muni bonds. You can't even figure out what the spread is for many muni bonds. But when you can, it's usually huge.
This Maricopa County bond is one of the few I could find on Fidelity's brokerage site that actually has a bid price. Take a look at the bid price ($103.608) and the ask price ($108.080). That's a 4.31% difference on a bond with a Yield to Worst of only 2.818%. It takes a year and a half just to earn back the spread. Compare that to the spread on the Vanguard Total Stock Market Index ETF. That'd be $0.01 (or less). Institutions moving large amounts of bonds might just get a better deal on these spreads than you can as an individual doc. Getting a higher yield may not be so great if the higher yield is more than eaten up by the spread. If you aren't taking the spread into account when dealing with municipal bonds, you're probably making a mistake.
More information here:
Municipal Bonds: How Much Is Safe?
Should I Use a State-Specific Municipal Bond Fund?
The 2 Reasons to Buy Individual Bonds Aren't Very Good
The first reason one might want to buy individual bonds is to save the expense ratio. Expense ratios are so trivial these days it is hard to justify the hassle unless you give up nothing else (like diversification) to get it.
The second reason is that you want to avoid losing principal because you think rates are going to continually rise during the life of the bond. If you are so sure about this, why would you buy a bond at all? Just leave your money in cash and buy bonds when your crystal ball tells you interest rates are going to start going down. Even if you admit you have no idea what interest rates are going to do and you just don't want to ever lose principal, look at everything you have to give up to get that guarantee. Worth it? Probably not for most.
What do you think? Do you buy individual muni bonds? Why or why not?
Which are you more against? Buying individual munis, buying whole life insurance, or buying a Tesla in California lol. All jokes aside thanks for the as usual very thorough walk through! You rock.
Thanks for the great tutorial on bonds! I’ve been buying short term treasuries as a place holder for funds that we’re using to build our retirement home in the next 2-3 years. We live in a state with very high income tax, and at least we’re saving on that.
As I approach retirement, I have been reading Why Bother With Bonds and The Bond Book to potentially transition some of our TIPS and Total Bond Fund allocation toward muni bonds. You are so right about the measly amounts that are available on the secondary market. And the spread on those offerings is another obstacle. However, what do you think about new issue munis for my specific state (I signed up for alerts from Fidelity) where I can purchase large lots, and hold to maturity? The yield to maturity still seems fairly reasonable for that bucket in my retirement strategy, especially considering a >9% state income tax.
Still not a huge fan, but buying new and holding until maturity does eliminate the liquidity issues. If you have a 9% state income tax, there’s got to be a muni bond fund out there for your state.
Thanks for the reply. Every state specific Muni bond fund that I have looked at has a 3% load and slightly higher expense ratios in the 0.8% range. And they’re investing in the bonds that I would hold to maturity, like the ones for my state academic med center.
Maybe I can help. What state?
Oregon. I would be interested in any leads regarding state-specific muni bond funds. Thanks!
Might be tough. I don’t know of a good Utah one for me to use so I use the Vanguard “national” one. A quick Google finds a few choices:
COEAX- Fidelity loaded fund, 0.84% ER, 3% load, only $302 million in the fund, but intermediate duration. I think I’d rather use the Vanguard national funds than that.
ORTFX – Aquila, 0.7% ER, $417M fund, 3% load, intermediate duration. Same issue with COEAX, just too expensive for a little extra tax break. I’d use the Vanguard national fund.
ETORX – Eaton Vance, 0.7% ER, $163 million, 3.25% load, intermediate duration. Same problems.
FORCX – Nuveen, 0.63% ER, $182 million, no load though. Probably the best of the bunch I’d suspect, but I still don’t think I’d pay 0.63% for a bond fund. Those extra fees eat up any benefit you’re going to get from having state specific bonds.
So I guess you’re stuck with a national fund or building your own if you really care that much.
I think buying new issue munis is the way to go, as long as they have a decent calendar in your state.
I deplore bond funds, because during the occasional market sell off, which happens fast and furious (just look at the end of last year’s worry about the Fed not pausing ), bond fund investors sell at the worst time. This hurts the investor that just wants to hold, and the fund manager that just wants to buy on these nice dips. I like to buy at these times, as the funds are forced to meet redemptions, and puke out attractive bonds at cheap prices. The street bidding on these bid lists know the funds have to sell, so they bid these bonds back, and offer them out cheap.
I have outperformed the index over the years by doing this strategy. Just buy AA-AAA underlying ratings with 5% coupons, and you will do just fine.
If you can beat the index so easily doing so, why isn’t there a hedge fund manager with the ability to lock up assets in a downturn to prevent that issue doing so?
While I”m always skeptical of anyone anonymously bragging about beating the index on the internet, in your case I’m especially curious if you’re adding in the value of your time to your calculation.
Re Section #4: I thought municipal bonds are typically sold in denominations of $5,000 per bond? $100 per bond seems small. My apologies if I’m wrong.
No, I think you’re correct. The $100 was a clarifying example.
Bonds have a $1,000 face value – Muni or corporate.
Full service Bond broker-dealers sometimes want minimums of $5k (5 bonds) .
However you can get the same or similar bond offerings
from “Self Directed Broker companies” like Schwab, Fidelity, Interactive Brokers, ETrade, Merrill Edge.
Some of these companies will sell bonds in $1k single quantity, however they will charge $10 fee for up to 10 bonds (ie. 1 to 10 bonds for $10, then $1 per bond) . Except for Fidelity ( the broker I prefer) which charges $1 per bond (no matter the number of bonds purchased). ** Please check each Broker’s fee policy, to clarify for yourself.
Why do you have 38 529 plans. ? Or is that a typo ?
I think it’s actually 39 now. 4 kids and 35 nieces and nephews.
Must be an utah thing lol. I’m in a Park City and started my529 (formerly UESP) for my two kids on the days the where born. Overfunded them so as soon as they earn $7000 each I will start the rollover to Roth. One still at the U. You know the growth potential, so that’s very vice of you to do that for your extended family. Good karma for you
BTW my muni’s at Vanguard are down and was tempted to TLH but they are paying a nice monthly dividend so will just let them recoverer and sell without a Hugh gain
I tax loss harvested my muni funds twice as rates climbed. Why not?
Not sure if you meant vice or nice, I’ll assume it’s a typo. You can’t take it with you. It’s been a very long time since we gave away more than we paid in tax, but we do give a lot away each year whether to charity or family.
I did mean Nice lol. That is very generous.
I suspect I might be one of the people Dr Dahle is talking about in the first paragraph. I bought individual munis for some time and was up around 20-25 at one point. I thought I did pretty well but I did not do a long term analysis whether I beat bond funds so I can’t say that with certainty, My post here is not going to be arguing that people should use the strategy but more just general comments.
Obviously the big reason you buy munis is to save on taxes so if you have a low tax rate there’s not much sense in buying them. Clearly they should not be held in a tax deferred or tax-free account.
I don’t think this was mentioned – some of the sites that will buy and sell bonds for you are high pressure “used car salesmen” types. The first muni I bought was from one of those but I figured that out pretty quickly, and after that just used a standard brokerage account.
Muni bonds can default. I held a bunch of bonds during the municipal bond crisis around 2008. Luckily none of my bonds defaulted. Just going by memory here but at one time the thought was that insured bonds were safe and you would pay a premium for insured bonds, but during that period some of the bond insurers were also failing and couldn’t meet their obligations. Bonds can also get called, but you know going in what your YTW is going to be and take that into account.
In my view there are a couple of advantages the individual investor has. One is bond funds have to trade in large lots, but the individual investor can trade in small or odd lots which can give you opportunities the bond fund doesn’t have. Also bond funds generally have to consistently buy bonds as funds come in, but you don’t. Many times I would have some extra money to invest but didn’t see anything I thought was worthwhile, so didn’t buy anything.
Sometimes there is a wide bid/ask spread, but you can bid whatever you want and if they don’t take it then who cares.
Re the time invested, once I learned the basics and terminology I thought it was enjoyable. Concepts like YTM and YTW are really pretty easy to grasp. You have to satisfy yourself on how safe the bond is but the information you need is publicly available. You have to have common sense – if you do a search and the highest yielding bonds are all from Jefferson County Alabama maybe you should figure out why that is.
I benefited from fairly stable interest rates and inflation during the time I was doing this. That was dumb luck on my part. Of course both individual bonds and bond funds took a hit the past few years Anyway I’m not encouraging anyone to use this approach, just giving my perspective.
Thanks for this excellent post. I fall into the “pissed that I lost principal when rates went up” camp. I viewed the fixed income part of my portfolio as the “rock” with reliable, low risk returns, and the equities part as the part where I take risk for more upside.
Can I get your thoughts on ishares ibonds etfs? My (admittedly limited) understanding is that they have finite end dates and, unlike traditional bond funds, won’t be forced to sell at a loss to ensure that duration on average is fixed.
Wouldn’t this be a nice compromise? You get diversification and low expense ratios without (any?) interest rate risk.
Compromise is a good description.
In what regard?
In that you still get the benefits of diversification inherent in a bond fund but don’t have a “loss of principal” issue as long as you don’t need liquidity.
Great article.
One additional strategy that you may find useful for future iterations of this piece; blackrock has low fee diversified bond ETFs that never lose principal (nominally) if held to maturity. Multiple categories – US treasuries, tips, munis, investment grade corporates and high yield corporates. These ETFs are relatively new, although the earliest funds have already matured and currently have maturities between 1 and almost 10 years. Won’t be nearly as liquid as VTI and will have some bid/ask spread, but these are a very interesting option for folks who want to be certain they never (or very rarely) will lose principal, while avoiding many of the downsides you so elegantly explained.
https://www.ishares.com/us/strategies/bond-etfs/build-better-bond-ladders
Thanks again for your great work.
I agree about those Blackrock funds, SizzleMC. (Invesco also has a similar product called BulletShares, https://www.invesco.com/us/en/solutions/invesco-etfs/bulletshares-fixed-income-etfs.html ) In an effort to take away some of the sequence risk from my recent retirement, my wife and I recently purchased a slug of Blackrock ETFs in both US Treasuries and Investment Grade Corporate Bonds for each year from 2025 to 2028, and we will likely go out another two years. Because they are baskets of bonds that all mature in the same year and the fund liquidates at the end of that year (as well as making monthly distributions), they should be more predictable than a “general bond fund.” They are also very low cost (e.g. 0.07% for the treasury fund and 0.10% for the corporate bond fund).
Yes, I agree that product does address some of these issues. Time will tell how much people care about them.
I’ve considered individual munis for the specific reason that I felt recently (maybe still now) would probably be a good time since rates are expected to fall. I’m well aware it’s a timing gamble and could be wrong, but the individual bonds give you precise timing if you want that. I haven’t done this though.. I’m always thinking that it’s like picking individual stocks…
Also speaking of timing, tax rate over the period of holding the bond is really important. I currently pay the top rate but I’m just a job loss away from that changing (or even perhaps an early retirement away). So I’ve hesitated to buy a 5 year duration bond when I can’t be sure I’ll stay at this tax rate for the whole time.
Hey Jim,
I find investing in individual muni bonds to be both interesting and useful. I live in Montana, which has a near 6% income tax. I’m nearing my FIRE number, and despite my young age, I wish for a conservative portfolio strategy. I’ve been laddering mostly individual treasury notes/bonds with the intention to hold until maturity to prepare for my FIRE date in 5 years and hedge against sequence of return risk. But as time has gone on, I have occasionally picked up some individual muni bonds. Presumably, unlike your situation in Utah, I do not have a good state muni bond option. There is one fund, and it has a 2.5% front-load fee, which seems crazy to me.
So instead, I’ve been occasionally buying intermediate-term muni bonds that appear to have pretty good risk-adjusted returns even compared to the higher quality-rated treasuries. While the quality of the muni bonds I buy is not as high as treasuries, they are not low quality either. I only buy munis with a Moody’s AA2 or higher rating or S&P AA rating or higher. Using this screen, I have found occasional offerings with YTWs on munis with maturities of 10+ years that provide a tax-adjusted (for a 32% tax bracket AND 5.9% state income tax) return well over 1% more than the corresponding treasury note/bond with the same maturity. Of course, I’m skeptical that I’m missing out on some key information. Maybe despite the high agency ratings, these bonds have a default imminent? Is this a Big Short situation where the bond ratings are falsely higher than they should be? I have no real way of knowing. Does my state’s single muni bond fund know more than me? Yes. But how much? I don’t know.
I’d be interested to know who exactly does know the particulars regarding a state’s muni bond market? I doubt your run-of-the-mill financial advisor has any great insight regarding individual muni bonds? Do you know how to get more information on individual muni bonds? So far, the best thing I have found is talking to the fixed income desks at Vanguard and Fidelity. I call them sometimes just to think out loud. I tell them why I am interested in a particular CUSIP and tell them the risks that I have identified. Then I have them point out risks that I might have overlooked. Both companies have been nice even though I’m only buying 5-10k lots at a time. I think they are used to much larger purchases than that.
Well anyways, thanks for your pod over the last 10+ years. It’s one of the main reasons I’m going to be able to retire when I want to.
I think your process demonstrates why many of us don’t bother. If I had to call up Fidelity every time to discuss a $5K lot I’d be using up more than $50 (1%) of time to do so.
I agree that the typical financial advisor is no expert in muni bonds.
If you really think about the reasons you became financially independent, I’ll bet the fact that you use individual munis instead of a muni bond fund isn’t in the top 10. As far as bond funds, I tend to use the Vanguard national ones rather than a state specific one. I don’t know of any great Utah (or Montana for that matter) bond funds. The most easily Googleable one, UTAHX, has an ER of 0.87%, has only $286M in assets, has a 0.2% 12b-1 fee, and a 3% front load. No thank you. But that doesn’t mean I have to buy individual Utah bonds.
Hi “sparty” ,
I noticed your question above :
“Do you know how to get more information on individual muni bonds? “.
** Once you see a CUSIP that you Might want to buy – then here’s how to Research that Muni Bond.
YES – take a look at MSRB – EMMA , it’s a Web Portal –
… FREE TO USE.
MSRB is the Regulator for Municipal Bond issuance and trading.
EMMA is the website that documents all Muni Bond trading and much more – you’ll see the original Offering Documents, the Scale of the offering that came under , you’ll see ALL buy-sell activity for dealers and Investors , There are also Tutorials for Investors.
…..
Some good ways to evaluate Muni Bonds, before buying them.
As you get familiar, you’ll become faster at evaluating bonds.
(1) Get the Cusip – enter into EMMA . Look at the Rating of the Bond. Ratings do matter.
(2) Look at the Size of the original offering , was that Cusip part of a larger offering – a $100 million offering is better than $10million offering . And $1billion offering is better than $100million offering. WHY ? – The larger the offering, the more Liquidity.
(3) Look at the trade activity in EMMA – what are the spreads ? what are the yields? When were the last trades ? You want actively traded bonds – that helps Liquidity. You’ll see ALL TRADES by the Minute.
(4) Look at the Scale – these are the different maturities and coupons offered in the same original offering.
(5) What type of Muni Bond is it ?
Is it a State G.O.(general state obligation don’t default) .
Is it a Revenue Bond – what’s the source of revenue (sales tax, toll roads, etc, etc)
……..
So take a look at MSRB – EMMA, get familiar with it.
You can even call the MSRB and they will Guide you through the EMMA functionality.
…..
All State Governments have Treasury Agencies, these agencies give advance notice to the public of new issues of State Muni Bonds – General Obligation Muni Bonds don’t default.
Put your name & email, on the Treasury Agency’s Email distribution – then contact your Bond Broker to tell them you’re interested in buying those bonds if the yields are what you want.
The State Treasury Agency will also publish the list of approved Brokers who are contracted to sell those specific Muni Bonds .
Call the State Treasury department for more information.
** I hope this helps. Good Luck !
I live in NYC.
What do you think of SWYXX–I think it is a NY Muni bond fund,
I am also looking at VNYTX and VYFXX…what do you think of these?
I think one reason people might prefer individual muni bonds is because they are easier to understand than bond funds.
The problem with the two Vanguard funds is that one is a long term fund, which I don’t really like, and the other is a money market fund, which isn’t really a bond fund at all in my view. I’m a short to intermediate bond guy and Vanguard doesn’t offer one of those for New York. The Schwab fund is short term, but doesn’t have the super low Vanguard expense ratios. I see your dilemma.
Hello Dr. Jim ,
I read your article with great interest.
Bond Funds will lose principal value for Investors depending on the Original purchase price of the Bond Fund (entry point)
or if there’s large Redemptions on that Bond Fund or ETF.
Typical Investors in Municipal Bonds ( historically from decades ago), were High Net Worth & Wealthy individuals , who already made a large sum of money (in the millions saved) and who wanted to continue earning income with a minimum of risk and the benefits of Triple Tax Free income (fed, state, Amt tax free).
These investors would receive their Tax Free interest payment, twice a year , and had the option to (1) reinvest in more bonds, tax free or taxable (2) buy stock equities (3) other investment vehicles like property (4) spend the money at their own discretion ( pay for children’s college).
The higher your 1040 Income, then the higher your After Tax Effective Yield ….!
Municipal Bond Investors can contact their State’s Treasury Agency and get Advance Notice of New Issue Muni Offerings,
many times these are State General Obligation Muni Bonds that DO NOT DEFAULT. The State Treasury will have an Open Offer Period for Retail Investors to buy their allocations first, before Dealers can make Bulk purchases. Take a look.
Just a simple way of looking at the benefits of owning individual Muni Bonds :
If an Investor bought $100k of Muni Bonds at 5% Yield
and held the bonds for 10 years , also reinvesting the semiannual Interest Income at 5% – at the end of 10 years
the $100k portfolio would be worth $163,861 in REAL PRINCIPAL DOLLARS. Similarly a $1millon investment would be worth $1,638,616.44 in real principal dollars.
So holding to maturity is worth doing. That’s about 61% in accumulated Interest Income in Ten Years.
Depending on the Investors Income tax rate, the effective “after tax” yield , can be very high – and is especially desirable because of the low risk of default for Municipal Bonds.
It’s a win – win situation for Investors who do NOT want the risk of the stock market or corporate bonds losses.
These Investors want 100% of their principal returned to them,
and will hold till maturity.
What about “how” to buy municipal bonds ?
There was a large Regulatory improvement (15 years ago)
in how Municipal Bond Dealers are allowed to sell bonds,
these dealers must disclose their commissions upfront per the MSRB. Also dealer-brokers cannot use Boiler Room tactics
to sell Municipal Bonds and they must disclose information such as Cusip numbers, liquidity, bond covenants, early call in provisions, and etc.
What about Pricing of Municipal Bonds?
The transactional pricing activity is disclosed by the
“minute” on MSRB EMMA website. A retail buyer can ask the dealer for the CUSIP# and look at that bond’s transaction activity — before agreeing to buy that Muni bond.
MSRB is there to Help the Retail Investors, they will answer phone calls. MSRB has Tutorials on Muni Bonds online.
For new Retail Investors, also look at Investopedia which is a starting place to learn Bond Terminology.
Pricing at Premium vs. At Par (100) vs. Discount:
Buying New Issues at Par are always preferred.
Like all investments – Buyer beware if you’re buying in
the Secondary Bond Market or buying at a Premium .
I avoid buying at large premiums , however if the Coupon is higher (5% or more) then a small premium might be worthwhile (101 to 103 maximum) assuming the Call date is 5years or more out.
Buying at a Discount or at Par(100), is always preferred.
The purpose of YTM & YTW calculations are to provide an “apples to apples comparison” between Bonds of similar yields and call dates – however the underlying assumption of YTM & YTW has always been “dubious” – the assumption is that the incoming interest income will be reinvested at the Same Interest Rate and the YTM/YTW represents a Present Value Discounted Yield calculation – not very likely.
*******
I use a Cash Flow analysis instead that simply uses
the Current Yield ( Coupon Rate Divided by “Offered Price” of the Bond).
Take the Current Yield and calculate the Interest Income per year and see how long it takes to pay for the Upfront Premium that the Muni Dealer is asking for ? If it’s unreasonable then
DON’T buy that bond – or avoid doing business with that Dealer-broker.
I’ll conclude my post on this topic by saying that many Retail Investors, both average and wealthy Investors, do NOT want to lose their nest egg savings in the stock market – and Muni Bonds are a great way to get Safe Tax Free Interest Income for the long term.
I’ve accumulated a nest egg and it has grown substantially over 20 years.
GOOD LUCK !!
You can’t reinvest the coupons of a bond into that same bond. But you can with a bond fund!
Your statement “You can’t reinvest the coupons of a bond into that same bond” – is partially correct. An investor receiving his semiannual coupon interest payment can do anything he chooses with the new money — he can buy other Muni Bonds at the “best rates he can locate” – and this is the challenge of investing in Bonds — trying to locate better coupons & higher yields – in other similar or better paying Muni Bonds ( hopefully tax free also).
It’s inconvenient to buy Individual Muni Bonds – but it can be very Profitable over the long term.
The point is that – your Tax Free Bond Interest income has an ” effectively higher yield after taxes” – because of the Investors’ 1099 Tax Rates . Wealthier individuals get a larger benefit – they love Muni Bonds !
How is it partially correct? You have to find a new bond to invest in. So you can’t reinvest the coupon into that same bond you already own.
You’re “partially correct” – because it is possible to put in a bid to buy the “same” bonds (cusip#s) – if you really want to. However, why would you care ?
All that matters is that you find similar or better bonds with similar or better coupons, similar or better yields and maturities – as you would desire to meet your “target investment criteria” …. so why would you care about buying the same exact Muni Bonds with the same Cusip #s ?
You’re “buying yield” ….. that’s the Goal to improve your Earned Interest Income.
….
Buying individual Muni Bonds is not an “auto pilot” process – as it would be for buying Bond Funds/ETFs , since Bond Funds have an Auto-Reinvest mechanism. HOWEVER … Bond Funds have a maintenance fee (management load) which definitely decreases your Net Effective Yields earned — when an investor buys an Individual Muni Bond , the price you obtain on purchase is your ONLY acquisition cost. Bond Funds charge their Management Fees every month & every year.
Those Management Fees are the “Price” you pay to the Fund Managers & sponsors for “Convenience” of having someone else do the work.
That’s the choice an individual (self directed) retail investor has to make .
Hope this makes sense. Thanks for letting me share some information.
I guess if you could find someone selling that exact bond at an amount that is similar to what you’re trying to reinvest, but practically speaking, you just can’t. You have to find a new “similar” bond to buy.
It’s not an auto pilot process but that expense ratio for a solid bond fund is so small at Vanguard that it can essentially be ignored. It’s 9 basis points. $9 a year for a $10,000 investment. Well worth the time savings especially given the liquidity and diversification benefits it provides.
I think I explained this in detail above.
You’re looking for Similar or Better YIELDS in individual bonds with maturities you want…
Why are we trying to buy the exact same bond ? We’re NOT aiming to do that.
All that matters is that you find a similar or better coupon/yield… and that’s do-able.
……
With fixed income – the Goal is to (1) Maximize Yield – and (2) Protect your Principal invested.
Any new interest income you receive can be used to reinvest in tax free bonds – if an investor is willing to take the time to look for it.
Muni Bond Funds , Corporate bond funds , CLO Funds are subject to the same Risks — alot of Redemptions(selling by investors) will Drop the Fund Values and NAVs – that will drop the value of the Investors’ original principal. It’s a definite risk to consider.
I hope I’ve cleared things up.
Hey in regards to buying at a premium/discount, I think one thing to add is the De Minimus rule. Many people will be surprised to find out if you buy at too large of a discount, you will end up paying ordinary interest on gains.
Hi –
I think you meant to write “ordinary Tax on gains” ?
However wouldn’t you be happier to pay Tax on Gains – rather than take a Tax Loss Credit on buying Bonds at a Premium (price) ?
* I like making Gains/profit over taking a loss…
I meant the gains are taxed like ordinary income if the discount is outside the de minimus rule.
Do I want to pay taxes at an ordinary income rate? Absolutely not. That’s why I am buying muni bonds in the first place.
Often times, buying at a premium is fine as long as the YTW is within your acceptable range and you are planning on holding until maturity. For instance, you might have to pay $103 instead of $100 for a muni that has a 6% coupon. That’s fine as long as the YTW is something like 5% or more (or whatever is your acceptable range). If you commit to holding until maturity, the only way that paying the premium is a problem is when the bond is callable or something like that and it gets called at $100 before you can make up the difference of $3 via coupon payments. You should know that however before you purchase it. And if it is callable, the YTW should already be calculated to reflect that.
I agree with what you’re saying and your approach to buying individual Muni bonds makes sense.
I’ve been buying Muni bonds for 20 years and have learned a lot about what to avoid – there are several benefits of buying and holding the Muni’s until maturity . Also I would (and still do) reinvest the tax free interest income in other tax free Munis that has similar or higher coupons & yields. It has a compound effect on the entire portfolio.
Those who use bond funds won’t be surprised. 🙂
This blog post has a lot more interaction than some of the more recent blog posts. I think that warrants a podcast episode. I’d make one just about buying individual bonds overall (not just munis). Munis might not be for everyone, but individual treasuries, for instance can be, so that could be popular. You can review the basics you already wrote about but then get a little deeper into the weeds even though you personally are not interested. Explaining things like what a call is, what a make whole call is, what a sinkable bond is, the deminimis rule, etc. When should I buy individual TIPs vs a TIPS fund vs ibonds (which aren’t bonds I know). What are the tax hassles of buying individual TIPS. What type of account should TIPS go into? What books to read (I like “The Bond Book.”) What sort of expert help is out there that really knows about buying individual bonds?
I know some of the topics above like where to put bonds in your accounts has been addressed but you get the idea.
As your audience has gotten older, I think more people are interested in this than you think albeit it’s a small minority of your listeners.
Of course it is boring but so are 99% of the financial topics that are covered and we all keep coming back each week.
It’s a little hard to get excited about a podcast discussion teaching how to do something that I think probably shouldn’t be done, but I suppose I’m okay with buying individual treasuries. I just think that’s best done buying at auction and holding until maturation. It might make for a worthwhile episode though.
Thau and Swedroe both have excellent bond books worth reading whether planning to invest in bonds directly or via funds.
All my bonds are in tax deferred except iBonds. Based on past posts you had I thought they were most tax inefficient so to locate them there. Now 100% of my tax deferred space is bonds. So now I’m wondering about making my Roth space bonds to keep them out of taxable longer. But the lower return makes me think maybe I don’t want them in Roth.
So I’m considering my first non-I bond taxable bonds soon. VWITX makes sense. Does the diversity there outweigh not getting state tax exempt by buying in your own state?
I dunno, but the lower expense ratio of VWITX vs most state muni bond funds certainly does.
Woo, shout out to Athens GA! Even though I love my city, I’m not sure their financials are awesome so would be anxious to buy any of their bonds. 🙂
Thanks for this. I recently came into significant money and live in a high-tax state. Would it make sense to use a professional money manager to construct a MUNI bond portfolio to cover income needs? It seems this could be a good source of low-risk (in terms of potential principal loss) tax-free income, albeit with an AUM fee.
I don’t get it. I just wrote an article saying no, it isn’t worth it. You should just buy a solid, low-cost muni bond fund instead of buying individual bonds or paying someone 1% to buy individual bonds on your behalf. Then your question at the end of it is “Should I hire someone to buy individual bonds on my behalf?”
No, you shouldn’t. That’s why I wrote the article you’re commenting on.
Now obviously there’s a few people in this comments who have become experts in bond buying over many years and are buying their own individual bonds. But none have really convinced me that anything I wrote isn’t 100% correct. I’m not saying one can’t, with sufficient experience and time, be there own muni bond fund manager. I’m saying it’s not worth it.
Sorry, I should have been more clear in my question. Many of your arguments referred to the disadvantages of an individual investor buying munis rather than paying a professional to do it. In my case I am thinking of putting $5+ million into a portfolio of individual munis that someone else manages (for <1% fee), so arguments about time value, diversification, illiquidity, and all the nuances of choosing bonds don't apply.
You mentioned that you've tax-loss harvested your muni funds, but wouldn't it be better not to have to do so by owning dozens of individual bonds that can be held to maturity?
Sometimes bond funds do worse than individual bonds held to maturity and sometimes the opposite occurs. Tax loss harvesting individual bonds would be a major pain so I’d put that point in favor of bond funds.
I see no advantage of individual muni bonds that is worth paying a significant AUM fee for. If you want to be H_Singh and manage your own bond portfolio instead of taking up pickleball, knock yourself out. But if you don’t, I think you’re better off paying Vanguard 9 basis points than an advisor 100 to manage your muni bond portfolio.
One should also consider what happens when you die. You can leave your 187 bonds to your spouse or kids or you can have it all in one nice little bond fund that is easily liquidated in 30 seconds by your executor.
I agree with you that construction and management of your own Bond portfolio (individual Muni & Corporate bonds) will take a little more time — but it has never been a daily activity – Why ? Because you don’t buy individual bonds everyday – only as you need to add individual bonds periodically. Also you don’t pay any Annual Consulting Fees to an advisor.
And you get better (more efficient) at managing individual bonds the more you hold & buy.
Management of my own Bond portfolio has never reduced my personal recreation time ….it’s Not a problem worth consideration.
Hi – “newly” ,
Congratulations on your financial good luck !
I noticed your question above:
” Would it make sense to use a professional money manager to construct a MUNI bond portfolio to cover income needs?”
If your inheritance is very large, perhaps over $20 million,
then be careful about which Professional Money Managers that you talk to – Check out their FINRA Complaints Records – it’s public information. Also it pays to avoid future problems , so find out if the Professional Money Manager has been Sued alot – Do a Name Search in State and Federal Court records, that person’s name might pop up repeatedly. … Buyer Beware .
Just a warning – Professional Money Managers will charge you a yearly fee – Every Year that they are allegedly “watching your bonds for you”.
So do a bunch of interviews , take detailed notes – and compare notes between the Professional Money Managers that you meet — I’m certain they will all say the Same Stuff repeatedly….
My point is – most of them can’t do anything special – that you can already do for yourself.
You’ll have to decide what level of confidence you have in learning about Bonds, fixed income products, stock/equity, Bond funds and etc.
Ask yourself this question:
Am I willing to take Losses based on some Professional Money Managers advice … ??
The more Educated you are about Investing, the happier you will be — Be a Skeptic. ! Learn for yourself. Good Luck.
When I sold my business I took 10% and bought 60+ munis all top two categories rated and insured with the help of a dealer I trusted. This provided a reasonable degree diversification and my lot sizes are big enough to appeal to larger players. I did this so that 1) a 1/3 of those could be in my state that is poorly represented in national funds, 2) I have a source of dependable income and 3) I use the amount I purchased in my net worth spreadsheet as a stable number. I realize I’m fooling myself and that value goes up and down in the market but I plan to hold until maturity/call or at least many, many years. This simplifies my life and tracking which is part of the goal because I see enough numbers in my sheet bounce around. This is an anchor in my portfolio much like my real estate holdings. It works for me.
Only # 1 possibly required you to buy individual munis (state dependent). The other two are available with a bond fund.
Thanks; this is a very help reference. I have a few bond funds through Vanguard but maintain a “large” portfolio of individual bonds (I place through accounts with JPMorgan and Fidelity/sub-managed by Blackrock). I am focused on the tax exempt interest earned from holding individual bonds and use that income to supplement my pension. I am retired and have the time but do not have to spend much time at all. While I agree that on my bond funds the expense ratio is close to zero, I am fine holding to maturity and avoiding the gyrations in bond funds from general market volatility. Income generation is the driver for me and loaded up with non-callable and 10 year no call periods.
Thanks for the summary.
Question on losing principal in bond funds.
Don’t most of these bond funds typically sell individual bonds when it is within one year of maturity? In this case, since it is close to maturity, the loss of principal would be relatively small.
Or is there something different about muni bond fund?
When they sell depends on the fund. A long term fund would sell long before one year. But no, nothing unique about a muni fund in this regard.
You have no idea what you are taking about. NEVER buy a bond mutual fund! Buy and OWN your tax free municipals for ever…You need to be schooled on proper investing . O.
I guess you’re here to do so, but I read your first comment, you don’t need to post four of them. Go ahead and school me, let’s here it.
While there is certainly nothing wrong with bond funds, I think you are overly negative on individual munis.
1) If you have a state income tax and want bonds that are state as well as federally tax-free, you may have limited choices of funds, and they aren’t always available with rock-bottom fees.
2) You list default risk and lack of diversification, but isn’t the reason, when it comes to bonds, that you want diversification is to avoid default risk? You aren’t looking for idiosyncratic capital appreciation. So these are really just one concern. And how much risk is one actually taking on? You used an example of an A+ bond. The 10 year cumulative default risk for A rated muni bonds is just 0.10%. Not 1 percent, 0.1 percent. If that is still too risky for you, move up to AA bonds and the cumulative 10 year default risk drops to 0..02% (https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/fixed-income/moodys-investors-service-data-report-us-municipal-bond.pdf) Personally, my individual munis are all AA or AA+.
3) If you have millions to invest each year and are buying in $1,000 lots, then yes, it will be very time consuming. Not so much if you are looking at lower sums to invest each year and invest in larger lots. I use a rough ladder (I concede it’s hard to set up a perfect ladder with some bonds being callable at a future date and available offerings when reinvesting). So once or twice a year I need to find a new bond or couple of bonds to invest in. It doesn’t take very long. I’ve done it both on my own and with the help of the bond desk at Schwab (whose assistance is free if your account balance is high enough).
I totally agree that the spreads and liquidity can be an issue if you sell before maturity. They can also be your friend when purchasing smaller lots. So don’t do individual munis if you anticipate selling them before maturity. I have my bonds split between G fund/treasuries (transitioning to G fund), individual munis, and a corporate bond fund. I also have an emergency fund. So I don’t anticipate a forced sale of any of my bonds, but if I did have to, I have treasuries/G fund and the maturing rungs on the treasury and muni ladders.
You buy an individual bond if you are not concerned with the market price. You are simply looking for a steady yield and do not need liquidity. Bond funds simply need 1 year like 2022 to offer anemic long term yields.
Buying individual bonds is something many wealthy people do, it certainly does not mean its the best strategy for everyone
I am a huge investor in individual municipal bonds and have been for many years. Over time, I’ve found that most all articles on this topic are from folks who really do not understand investing in municipal bonds, and so rightfully end up putting their money into muni bond funds. For these folks and most others who do not have the time or ambition to really understand the municipal bond market and do their own municipal bond investing, it is the right approach. However, it does not mean that their reasoning is always correct. It simply means they are able to justify why they decided to go the fund route, even if some of their logic is incorrect.
I could write an article as long and thorough on why I will only invest in individual municipal bonds and never a muni bond fund. However, the audience reading is quite small and I’m not sure would appreciate it. H_SINGH and ORACLE get it, they are my choir.
I will simply provide a few points for consideration, along with some of my own experiences. The past few years have provided all the evidence necessary as to why my approach works best, for me at the very least.
1. Most folks only focus on tax free municipal bonds. However, understand there is an entire class of taxable municipal bonds. Why would anyone be interested in taxable municipal bonds? A couple reasons:
a) In a tax-advantaged account, like a traditional IRA you would not want to hold tax free municipal bonds. Taxable munis are perfect here.
b) In theory, in an efficient market, we would expect the effective yield for a taxable municipal bond to be the same as the tax free equivalent. At the end of the day, I’ve found there is little benefit to owning a tax free muni over the taxable equivalent. However, for those who are interested, the brokerages all provide calculators that offer tax equivalent yields which can guide the investor to whether a tax free or taxable municipal bond might be better for their situation.
2. Authors of these types of articles will always, always focus on the high profile defaults of Detroit, Puerto Rico, WPPSS, and Orange County. The fact of the matter is that defaults in municipal bonds are extraordinarily rare. For anyone who has interest, Moody’s puts out a biannual report on the municipal bond market defaults and recoveries, going back over the past 50 years. The numbers speak for themselves. Stick to investment grade municipal bonds rated A or better and the probability of default is on the order of 0.02%, meaning 2 in 10,000. I would contend, that it would be almost impossible for someone to even try to pick one that will default. Where folks get in trouble – as with all investments, taking risks in an attempt to get higher returns by purchasing lower quality. A few years back, I remember seeing folks posting and convincing themselves that buying Puerto Rico munis was safe…as the pricing in the market was already down to 50 cents on the dollar and effective annual yields were surpassing 15%. Those folks got what they deserved.
Here is a link to the most recent edition of the Moody’s report – pay particular attention to Exhibit 9 on Page 11:
https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/fixed-income/moodys-investors-service-data-report-us-municipal-bond.pdf
3. When I purchase individual municipal bonds, I know everything at the time of purchase. I know exactly how much my returns will be and over what time period. I know the dates I will receive my interest payments, and I know the date I will receive my principal back. When someone purchases a muni bond fund, there are no guarantees, because there is no maturity date. Me, I like/want the certainty provided. It makes retirement planning very easy, because I know all of my cash flows. That cannot happen with mutual fund investing.
4. The municipal bond fund has a different investment objective and approach to investing than the individual investor.
a) The muni bond fund manager is going to be picking bonds of all kinds. Most folks will call this diversification, I like “de-worse-ification”. The fund will purchase lower rated bonds – those rated below A, many times even bonds rated below B. As an individual investor I would never, ever do that. Sure, periodically I will dip into BBB’s, after doing a thorough investigation and coming to the conclusion that the rating agencies either got it wrong, or the issue is due for review and upgrade. All the information for an individual investor to research is publicly available, as H_SINGH indicated, on the emma.msrb.org website.
b) The muni fund is actually doing the opposite of what an investor should be doing. Let’s take what’s happened with the historic rise in interest rates over the past few years, and the simultaneous associated historic negative performance of bond funds. While interest rates are rising and bond prices are falling what should the investor be doing? BUYING. Buy low, sell high. However, what actually happened? Bond fund investors freaked out. They were questioning why they even hold any allocation of bonds. Go check out what was taking place on Bogleheads. A bunch of chickens running around with their heads cut off. They were dumping their bond funds left and right to end their pain. Now, when they were all tossing their bond fund investments, what did the bond funds do? They were required to sell bonds out of their portfolio to meet redemptions – again, selling at the worst possible time, locking in portfolio losses. Me, I stuck to my approach – continue purchasing additional municipal bonds with my continual interest payments, redemptions, and maturities. Lower yielding maturities were replaced with significantly higher yielding ones (double and triple the prior yield).
Now, in the few years leading up to the start of rate increases, what was happening? The exact opposite. Folks were plowing in to muni funds when yields were low. The funds had to take that money and lock in bond purchases at those low yields. Me, I was strategically selling some of my most overpriced munis for big profits. If effective yields to maturity are 1% or 2% and I can lock in a 20% capital gain/profit today, I’m absolutely going to do that.
5. My performance is far better than the municipal bond funds and with lower risk over every time period tracked. How do I know this? Fidelity tells me, comparing my portfolio (99% individual municipal bonds) vs. the major bond and muni bond indexes.
There are additional points I can make, but I’ll leave it there.
I will be the first to admit, I am not the typical investor. My muni bond holdings (again, 99% asset allocation) could be called a muni bond fund in itself. However, the data speaks for itself. Muni bonds are extraordinarily safe, they provide predictability in returns and cash flow, and with the proper understanding and approach, the individual can outperform the muni bond funds.
If you do want to write a guest post, I’d be all ears. https://www.whitecoatinvestor.com/contact/guest-post-policy/
Thanks for that Josh. I’ll consider it, but, at up to 6 months between time of submission to actual posting, it seems the author has to really have a desire for it to be published for the audience. Again, I’m not confident that there is a wide audience here who are interested, or are willing/looking to put the effort into individual investing based on what I’ve seen in general about municipal bond discussion. Try doing a google search for municipal bond forums and you’ll see what I mean.
Knowing of your interest, I’ll try to make some time to put more of my points together and post here.
Thanks again – I appreciate it.
You’re just running your own muni bond fund. Are you including an amount for the value of your time when calculating your returns?
No more than any other DIY investor includes the value of the time they spend managing their investments. In retirement, time is the one thing I have plenty of. I wouldn’t go putting a dollar figure on the value of that time any more than any other activity I do with my time – whether that be a hobby, traveling, exercise, cleaning the house, eating a meal, or relaxing.
Of course, in the beginning, there was some additional time for learning curve, researching, and such. However, since then, it really does not require much time at all. Again no more than what any other DIY investor might spend managing their investments. As a muni bond knowledgeable investor, when I have funds ready for reinvestment, it is an easy and relatively quick process to identify new bonds for potential purchase, research, and make the purchase. I know what public documents I’m looking for, and the specific information contained in them. They are all residing at emma.msrb.org, follow the same format, and use the same language. Think of it in a similar manner as reading a patient chart.
In any case, I wanted to share my experience, what I know of the muni bond market and some misconceptions some very smart DIY investors have settled into regarding investment in individual municipal bonds.
Best regards.
My parents mutual fund portfolio is managed in about a half hour a year. I know because I manage it. There’s no looking up documents involved. That’s what you’re competing against. I mean, if this is fun for you and what you’d rather do than anything else, fine, but otherwise a fair comparison has to account for your time. I’m having a separate discussion about Buffered ETFs with a retiree and he spends “several hours a day” on them. That’s not even a hobby, that’s a job.
So if you spend 50 hours a year and you eke out an extra 1% return over what you’d get with a fund, and your portfolio is $500K in muni bonds, then that’s $5K/50 hours = then that’s basically a job that pays $100 an hour. Or if you judge your time to be worth $300 an hour and spend 20 hours a year on it, then you should subtract $6,000 from your return to determine what you’re really making doing this.
Do what you want, it’s your money, but this doesn’t seem to be the place to spend extra time and effort to me if you’re just trying to add value to your investments. There are much better ways to add value IMHO. A muni bond fund is “good enough” and has lots of benefits over building your own. Maybe I’m just skeptical that you’re better at this than Greg Davis who only charges me 9 basis points for his services. Feels like money well spent to me.
It’s more than “eeking out an extra 1%”, and significantly more than $500K in muni bonds.
For you, the 9 basis points that Greg Davis is charging you is worth it. You really do not understand the muni bond market, you don’t want to put in the time to understand it or manage investing in the individual bonds…and that’s all perfectly fine for your purposes. However, don’t fool yourself or others into believing that as an individual investor you can’t outperform your muni bond fund, by a significant amount, and do it with less risk. You’re welcome to take what the market gives you, and for lots of folks that’s good enough. For me, and what I’ve learned, it’s not good enough at all.
What are your parents holding, VTEAX? Vanguard shows 3-year annualized returns of negative 0.81%, beating its benchmark which was negative 0.88%. My muni portfolio had an annualized 3-year return of 2.88% – beating VTEAX by 3.69% each year. That’s a difference of almost $37,000 per year on each $1 million, and I’m at several million. Further, the risk and volatility measures of my portfolio are significantly lower than the Vanguard fund and the benchmark index – again, Fidelity says so.
You can be skeptical of what I say – you don’t know me from Adam. However, I am presenting you with facts regarding the municipal bond market and individual municipal bonds in general. The Moody’s report counters your argument regarding your perceived risk of owning individual municipal bonds justified by your few typical examples. As far as performance of my portfolio, you are free to believe what you like. I wouldn’t be commenting or making the points I have been if I was simply eeking out an additional 1% with lots of effort.
I’m going to bow out at this point. This discussion is beginning to go the typical route when a knowledgeable muni bond investor looks to straighten out some misconceptions being presented. I’m not looking for a debate. If you’re happy with what you have, that’s all that matters.
Good luck beating the market. But if you’re truly that talented, you shouldn’t just be managing your money. You’re tracking your own returns and seem to be doing well. So why not gather assets and charge management fees on them and really put your talent to work? Why settle for a few hundred thousand a year when you could be making millions with your apparently rare talent?
Now your money is almost all in munis, so I can see why you’d want to put lots of effort in there. But munis are less than 10% of my portfolio. Putting effort in like you describe into 10 different asset classes is a non-starter. I have better things to do with my life. Better ways to make money too.
My parents aren’t rich enough to need muni bonds. The bonds they own are taxable.
Now, as you argue with what I do and my recommendations to others, you have to consider whether your methods are applicable to those to whom I speak/write. Most of my audience is flummoxed by the Backdoor Roth IRA, a two step process, to the point where they run out and hire a financial advisor. And you want me to tell them all to go analyze individual munis? Seems a bit out of touch with the reality of the world around you.