Author Topic: Municipal Bond Investing Primer  (Read 2803 times)

Sid888

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Municipal Bond Investing Primer
« on: January 21, 2016, 07:34:11 AM »
I'm a newbie at investing in Municipal Bonds and looking for some basic information.   I have a pretty good retirement portfolio built up and primarily invested in Vanguard Stock Index Funds and a High Dividend ETF.  Our liquid non-retirement savings is just "laying around."

We have about $300,000 in non-retirement savings that is not invested.  We would like to use that money to pay off our mortgage (it's a 15 year loan at 3% that we owe about $325,000 on now) or use the money to get a great cash real estate deal if the real estate market drops in Chicago (and we believe that is highly likely over the next few years).  This money is just sitting around along with an interest in a farm that's worth about $400,000 now and making about $7000 in rent.  We are happy in our current home and it's large enough for our family.  Our current mortgage allows us to pay off roughly $2000, a month in principal ($24,000 annually) and we pay the bank $800 ($9600 annually).  The mortgage is affordable and will be paid off before our children hit college if we don't pay it in advance.

We are conservative investors so an annual 4% ROI that is tax free would be great. 

Our goal is really to create a stream of income that we would use to pay real estate taxes and save for our children's college education while we stay put in our current home but liquid enough to get out if a better real estate opportunity comes along.

We want to see if investing in Municipal Bonds is appropriate for our situation.

1.  How do I invest in Municipal Bonds directly versus an index fund at Vanguard or some other low fee fund?

2.  Which is better - or what are the pluses and minuses of investing directly or in an index fund?

3.  Do Municipal Index Funds pay dividends that rival annual interest payments from directly investing in Bonds?

4.  How liquid are Bonds that you own directly?

5.  Any risks with price declines from interest spikes or Municipal Bankruptcy (Puerto Rico, for example) that I should be concerned with today?

6.  Should we hold off until the Fed starts to raise interest rates in earnest?

Thanks in advance for your information, opinion and advice.  Please don't hold back.

MustacheAndaHalf

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Re: Municipal Bond Investing Primer
« Reply #1 on: January 21, 2016, 12:03:27 PM »
I strongly recommend a book on bonds before you take the plunge into individual municipal bonds.

There are different types, like "revenue bonds" which get their funding directly from taxes.  Other bonds may not have a source of funding, and so are riskier.  Bonds have different legal clauses, like if they can be redeemed early or how the maturities are staggered in random lots.  You pay once to buy a bond, and pay to sell it before maturity (generally in the decades).  Buying bonds in your home state means they are exempt from Federal and State taxes.

A bond fund gives you liquidity but you pay the expense ratio.  For example, Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX) charges 0.12% annually.  So if you invest $25,000 there you're paying $30/year for the mix of municipal bonds in that fund.

I think there's some value to buying the mix of national municipal bonds even if you're in a high tax state.  It provides better diversification than having all your bonds in your home state.  Vanguard has some state-specific municipal bond funds (for at least CA, NY) so those might be an option.

Financial.Velociraptor

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Re: Municipal Bond Investing Primer
« Reply #2 on: January 21, 2016, 01:30:04 PM »
I like to buy closed end municipal bond funds when they are selling at a discount to NAV.  Stachians will poo-poo the fees but I think it is worth it for good diversification and you are also partly paying for the 30-40% leverage most CEF bond funds carry.  I like and own IIM, IQI, NEA, NIO.  All are yielding about 6%, fed tax exempt.

Interest Compound

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Re: Municipal Bond Investing Primer
« Reply #3 on: January 21, 2016, 02:22:07 PM »
How much income are you bringing in each year? It's extremely likely that Municipal Bonds don't make sense for your tax bracket. And by not making sense, I mean "will result in you having less money". If you're not comfortable sharing, this thread explains how to calculate the taxable bond equivalent return yourself:

forum.mrmoneymustache.com/investor-alley/when-to-use-municipal-(tax-exempt)-bonds

Also, considering your questions, under no circumstances should you be investing in individual bonds. Seriously, and I only say this because you asked us not to hold back, you have no idea what you're doing. The bond market is about twice as big as the stock market, and much more efficient. You have absolutely no business purchasing individual bonds.

BFGirl

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Re: Municipal Bond Investing Primer
« Reply #4 on: January 23, 2016, 05:19:30 AM »
At first, I was going to try to purchase individual municipal bonds, but decided, on the advice of an advisor, to go with tax exempt municipal funds. If you own individual bonds and need to sell before maturity, you have to sell in the secondary market, so they are not as liquid as a fund.  There are also things to look at such as ratings and whether or not the bonds are insured.  As another poster mentioned, there are different funding sources to pay back the bonds, which effects its risk.

mrpercentage

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Re: Municipal Bond Investing Primer
« Reply #5 on: January 26, 2016, 02:22:48 AM »

Also, considering your questions, under no circumstances should you be investing in individual bonds. Seriously, and I only say this because you asked us not to hold back, you have no idea what you're doing. The bond market is about twice as big as the stock market, and much more efficient. You have absolutely no business purchasing individual bonds.

Thats ridiculous. Thats like saying you can never drive because you never have. They are asking for someone to point the way. I think municipals would be better than most.
Advantages are obvious. You control selling. If you hold to maturity you can not lose principal unless they default. Time and time again I hear bonds lose value due to liquidity not insolvency. If you hold an individual bond and can for the duration you have just eliminated a bonds biggest problem.

Here is where you get government bonds http://www.treasurydirect.gov
« Last Edit: January 26, 2016, 02:32:41 AM by mrpercentage »