VTSMX vs VCAIX in Calif.

[perinova]

VCAIX vs VTSMX

It's been a long time since I've posted here. I've closed my consulting business in NJ and moved to CA for W*RK. (I'd made that decision pretty much in the confusion of the last days of 08.)

Anyway I couldn't easily find the answer to this question for someone living in CA. Is it wise to replace all or partially VTSMX Total Bond; which I have owned for quite a while now.
With VCAIX Calif. Intermediate Tax Exempt muni?

Return wise it seems like a good idea - VCAIX has a good after tax return. Is replacing all to Tax exempt a good idea?

2nd question I am not sure about relates to the current economoc situation. Is Tax exempt the way to go? Specially Calif has a big economy and budget problem to solve. If local govt start defaulting this could wreck havoc on munis here?

Thanks for your opinion guys.

[ESRwannabe]

I think you are comparing an apple to an orange.

The CA muni bond fund, I'm guessing, is going to have a lot higher percentage of defaults. So, the question is are you getting a sufficient yield to offset the increased credit risk? Historically munis have been very safe, but I am of the opinion that the US is not what it used to be.

Here is a formula you can use to compare the yields on munis to that of normal bond funds.

muni yield / (1 - tax rate)

So, for example, if you have a 28% marginal tax rate and 10% state taxes, and let's say the muni bond fund has a yield of 3%. Then you have:

3 / (1 - .38) = 4.84%

So... when you add in the tax benefits of the muni fund it is like having a 4.84% yield from a normal bond fund like total bond. This will let you make the comparisons. Whether or not the yield is sufficient is up to you.

[perinova]

Thanks ESRwannabe
I did the after Tax comparison (same calculation you mentioned). Looking at past performance is favorable or at least equivalent to the Total Bond fund..

Past performance is good but I am worried about trading a very diversified taxable bond fund for single state Calif. muni fund in 2010.
I didn't find much on the internet on this subject. I have been aware though that Sacramento is trying to fill a budget deficit somehow at the expense of municipalities. Ut might affect their ability to repay their debts? Whether or not this is a real concern I am not sure...

[ziggy29]

I'd want to know how much of the muni fund is in revenue bonds versus GO bonds. I'd feel a lot better knowing it was mostly in GO bonds as opposed to revenue bonds.

[CaseInPoint]

I recently participated in a similar discussion about VCADX in the Bogleheads forum: Bogleheads :: View topic - California Tax-Exempt Bonds - OK Core Holding?

[jayc]

I would buy neither. VTSMX has a 5 and 10 year negative return. CA muni is the LAST place I would put any money.

[DblDoc]

Quote:

Originally Posted by jayc I would buy neither. VTSMX has a 5 and 10 year negative return. CA muni is the LAST place I would put any money.

I think the OP meant VBMFX - Vanguards Bond Index fund.

DD

[perinova]

Quote:

Originally Posted by DblDoc I think the OP meant VBMFX - Vanguards Bond Index fund. DD

You're right I meant VBMFX... or its equivalent Admiral.
Thanks for the Boglehead link. The post from OptionAl there is interesting and worrisome.

My question is not about interest change or how much tax savings but how wise it owuld be to invest in munis and state issued bonds at this time. Particularly in California and its budget deficit, high unemployment and economic issues. (Arnold just put 2/3rd of the state govt on furlough...)

A much shorter maturity than VCADX would be more appropriate?

[perinova]

Quote:

Originally Posted by jayc I would buy neither. VTSMX has a 5 and 10 year negative return.

jayc

isn't that the same thing for the whole market? That is why we put money out of the market (ie bonds etc) and rebalance.
also in the meantime there were dividend payments.
this may be the same thing as buying those other vanguard funds,,,

can you suggest anything better than VTSMX for stocks? (maybe you have a link to previous post)

thanks

[jayc]

Quote:

Originally Posted by perinova jayc isn't that the same thing for the whole market? That is why we put money out of the market (ie bonds etc) and rebalance. also in the meantime there were dividend payments. this may be the same thing as buying those other vanguard funds,,, can you suggest anything better than VTSMX for stocks? (maybe you have a link to previous post) thanks

I have no suggestion for stock mutual funds. The 3 mutual funds I own are still underwater from the last few years. I am only about 15% equity.

All of my mutual fund purchases seem to bleed 3-5% every year until I unload them. Use search in this forum for good suggestions.