Why I Have Avoided Municipal Bonds and Funds
July 16, 2012 by MJP
Filed under Investing for Retirement
None of our retirement investments are in municipal bond and funds. This is a deliberate decision on our part. I wrote about the questionable future of muni bonds eighteen months ago. Conditions may become worse.
How can things be worse? As a recent article points out, the “stigma” against municipal bankruptcies seems to be fading away. Two large cities in California – Stockton and San Bernardino – have recently filed bankruptcy. More are likely to follow, to shed themselves of oppressive union contracts and crushing pension obligations. Holders of general obligation municipal bonds are at risk of losing their investment when this happens.
The primary reason for holding municipal bonds is tax avoidance. In the present economy, this benefit does not provide a sufficient risk premium in my opinion. I would rather own a less risky taxable investment inside a tax-deferred retirement account.
Generally, I’m not a follower of Warren Buffet’s investment advice because as a multi-billionaire, he can take risks that the rest of us cannot. But when Buffet is talking down municipal bonds, I pay attention.
Here is the article that talks about the risks.
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Overt fear of a rash of municipal bankruptcies is a media-fueled phenomenon. There has been much in the media re: Stockton and San Bernardino in California, but the fact is that there have been more municipal bankruptcies in………..Nebraska! Heard about that in the media? Not likely. While I do not recommend holding individual bonds, a well-managed muni fund with investment oversight and providing broad risk diversification still offers a significant risk premium over comparable “liquidity type” investments with a low/manageable downside.
Not only are widespread municipal bankruptcies not likely to happen. The tax happy idiots are going to make sure that there is increased taxation of social security and income. Better have some strategies to avoid taxes and keep the AGI lower.