Muni bond or Bond fund

[MichaelL]

I'm trying to decide if I want to buy some more California Muni bonds that a broker is offering. They pay 4% and are AA rated and are state and federal tax free. I'm deciding between buying more bonds or more in bond funds. I'm wondering what people think about buying an holding bonds and specifically California Muni bonds and what you think about bond funds, both index and managed. I'm sure this has been talked about a lot and people have different ideas, but I'm just looking for where people are at now. I like that the bonds are tax free, pay a decent rate, and don't have a management fee but I'm a bit concerned about the state of financial affairs in California.

For background I currently have 3.5% of my net worth in California Muni bonds. I have 3.5% in bond funds including an broad index fund and a managed Muni fund. I have 2.6% of my network worth in cash with this brokerage to invest.

I'm in the 24% tax bracket now that I'm retired and I'm moving to Nevada, which is state tax free, in a few months. I have other investments, mostly mutual funds and two condominiums and other cash to invest.

Thanks for the replies.

[COcheesehead]

What is the term of the bond? It has to be out there a ways. So duration/interest rate risk would be one consideration. Concentration risk would be another since you already have 3.5% in CA muni's. Do you need the money in the future? So consider liquidity.

[njhowie]

I do not like bond funds, only own the bonds if you're a "buy and hold to maturity" kind of person.

If the CA bonds are highly rated, you've read through the offering statement and are comfortable with all the terms, then do it.

3.5% is not a heavy weighting, so I don't think you have anything to really worry about.

I own numerous CA pre-refunded/escrowed municipal bonds (among others) and would grab lots more for my portfolio should some good ones pop up.

I will never buy a bond fund - I want total control.

[COcheesehead]

I am with njhowie. Not a big fan of bond funds.

[MichaelL]

Quote:

Originally Posted by COcheesehead What is the term of the bond? It has to be out there a ways. So duration/interest rate risk would be one consideration. Concentration risk would be another since you already have 3.5% in CA muni's. Do you need the money in the future? So consider liquidity.

They are 30 year bonds. I won't last until maturity. I'm 66. If things go well I won't need the money and I'll leave them to someone. If things go south I could have to sell them before maturity.

[OldShooter]

I'm with the others in not liking bond funds. For junk and emerging markets, having expert managers is important but why would you want to have that kind of stuff in the "safe" side of your asset allocation anyway? For high quality US corporates and definitely for treasuries, the manager cost is just money down the toilet.

That said, there is an argument for diversification if you are buying corporates or munis rather than near-zero-risk treasuries. I don't know what the right number is, but with $100K you could certainly diversify across companies and sectors or states and municipalities. Diversifying munis should include diversification across states, something that will be easier for you to do in NV. Further I would avoid states like CA and IL which have major financial and pension liability issues. Bond desks like Schwab and Fido have can help you design a diversified portfolio. I definitely would not put 2.6% of my net worth into a single bond issue of any rating or any kind. YMMV of course.

The other thing to be aware of is that the tax tail shouldn't be wagging the investment dog. IOW, compare alternatives both for risk and for net after-tax dollars in your pocket. The goal is to maximize the pocket, not to avoid taxes.

[njhowie]

Quote:

Originally Posted by OldShooter Further I would avoid states like CA and IL which have major financial and pension liability issues. Bond desks like Schwab and Fido have can help you design a diversified portfolio. I definitely would not put 2.6% of my net worth into a single bond issue of any rating or any kind. YMMV of course.

Because there are many folks like yourself who will not purchase CA, IL, along with some other states, it provides opportunity for everyone else who has the ability to do the work to understand the offering statement, properly analyze the municipality's finances, and know when they are looking at a quality bond. As I pointed out in my case - I own many CA along with IL and NJ pre-refunded and escrowed municipal bonds. These are on par with US treasuries - because all interest and principal is in an irrevocable escrowed account only holding treasury securities, and managed by an outside escrow agent. Zero risk and there are many folks like yourself who will not look any further than the fact it is issued by CA or IL.

I have a couple of CA issues each comprising 3% of my portfolio - pre-refunded and irrevocably escrowed issues. Zero risk. Probably a total of 10% of my portfolio across all the CA munis I own. I'll buy them all day long.

Further, I would not work with any brokerage's bond desk to design a portfolio, unless you are uncomfortable buying individual bonds and researching - potential moral hazard. Will they be suggesting what's best for you, or simply looking to unload the garbage that's been sitting in their inventory longest that nobody else wants?

[brewer12345]

If you are moving to Nevada, there is little reason to buy California munis.

[COcheesehead]

Quote:

Originally Posted by njhowie Because there are many folks like yourself who will not purchase CA, IL, along with some other states, it provides opportunity for everyone else who has the ability to do the work to understand the offering statement, properly analyze the municipality's finances, and know when they are looking at a quality bond. As I pointed out in my case - I own many CA along with IL and NJ pre-refunded and escrowed municipal bonds. These are on par with US treasuries - because all interest and principal is in an irrevocable escrowed account only holding treasury securities, and managed by an outside escrow agent. Zero risk and there are many folks like yourself who will not look any further than the fact it is issued by CA or IL. I have a couple of CA issues each comprising 3% of my portfolio - pre-refunded and irrevocably escrowed issues. Zero risk. Probably a total of 10% of my portfolio across all the CA munis I own. I'll buy them all day long. Further, I would not work with any brokerage's bond desk to design a portfolio, unless you are uncomfortable buying individual bonds and researching - potential moral hazard. Will they be suggesting what's best for you, or simply looking to unload the garbage that's been sitting in their inventory longest that nobody else wants?

I just did a quick search on ETM or prefunded muni’s and the yields are really low, below the tax adjusted money market rates I can get in some cases. What kind of rates are you getting?

[njhowie]

Quote:

Originally Posted by COcheesehead I just did a quick search on ETM or prefunded muni’s and the yields are really low, below the tax adjusted money market rates I can get in some cases. What kind of rates are you getting?

Will send you a message in the next day or two as we think similarly on bonds and others may not have as much interest.

[COcheesehead]

Quote:

Originally Posted by njhowie Will send you a message in the next day or two as we think similarly on bonds and others may not have as much interest.

I will, thank you.

[OldShooter]

Quote:

Originally Posted by njhowie ... Further, I would not work with any brokerage's bond desk to design a portfolio, unless you are uncomfortable buying individual bonds and researching - potential moral hazard. Will they be suggesting what's best for you, or simply looking to unload the garbage that's been sitting in their inventory longest that nobody else wants?

I am not a big bond guy but what I have bought at Schwab has not come from their inventory. But certainly with any financial investment due diligence is necessary. With tens of thousands of bonds out there, though, I feel that having them filtered for me is beneficial. I do not do business with anyone or any organization I feel I cannot (in a broad sense) trust. Will anyone or any organization sometimes do things that are not in my best interest? Probably. That's where "trust but verify" comes in.

Quote:

Originally Posted by COcheesehead I just did a quick search on ETM or prefunded muni’s and the yields are really low, below the tax adjusted money market rates I can get in some cases. What kind of rates are you getting?

Yes. That is the question that came to my mind too after reading @njhowie's post.TANSTAAFL. Did you get an answer to your question?

[COcheesehead]

Quote:

Originally Posted by OldShooter I am not a big bond guy but what I have bought at Schwab has not come from their inventory. But certainly with any financial investment due diligence is necessary. With tens of thousands of bonds out there, though, I feel that having them filtered for me is beneficial. I do not do business with anyone or any organization I feel I cannot (in a broad sense) trust. Will anyone or any organization sometimes do things that are not in my best interest? Probably. That's where "trust but verify" comes in. Yes. That is the question that came to my mind too after reading @njhowie's post.TANSTAAFL. Did you get an answer to your question?

I did. He is a good resource and a valuable member to have on here.

[Pete10k]

I hold a few well rated muni bonds paying about 5%. Recently I’ve been dumping short term cash (12mo’s emergency cash) into vteb and vcsh. Anyone else here own either of those? They are vanguard short/interm muni bond funds that pay a decent amount to hold.

[audreyh1]

Quote:

Originally Posted by Pete10k I hold a few well rated muni bonds paying about 5%. Recently I’ve been dumping short term cash (12mo’s emergency cash) into vteb and vcsh. Anyone else here own either of those? They are vanguard short/interm muni bond funds that pay a decent amount to hold.

VCSH is a short-term corporate bond fund, not a muni bond fund.

[Pete10k]

Quote:

Originally Posted by audreyh1 VCSH is a short-term corporate bond fund, not a muni bond fund.

Correct. My error. It’s in one of my Ira’s that I’ll soon draw from.