When you’re a municipal bond investor, there can be a lot of distractions.
What’s the Fed’s next move?
Where’s the economy headed? Which way will the political winds blow?
While the list is virtually endless, one distraction looms particularly large: market timing. Finding the precise moment that will minimize your investment costs and maximize your returns (i.e. buy low/sell high) is both the Holy Grail… and the ultimate red herring.
Success in muni investing: Do the arithmetic
We’ve written about it countless times over the years (from deep in our archives, see: “The Cost of Waiting, Part 2”), and the point was recently underscored by Columbia Threadneedle Investments.
Their scenario involved annual investments, in the Bloomberg Barclays Municipal Bond Index from 2000 through 2016, made by four types of investors: Mr. Consistent, who invested the same amount each month; Mr. Lucky, who poured in funds when prices were low; Mr. Unlucky, who bought high; and Mr. Frozen, who stayed on the sidelines and did nothing with his cash.
In a nutshell, the winner was, of course, Mr. Lucky – though his enthusiasm was muted.
His reward for being clairvoyant was a paltry quarter of 1% more annualized return than the next most successful investor, Mr. Consistent.
Next up was Mr. Unlucky, followed by the investor who did nothing, whose returns were 3.5% behind the consistent investor’s performance.
So the payoff for being perfect – which, practically speaking, is impossible over time – is dismal, while the penalty for inaction is severe.
Fortunately, you don’t need to be lucky to be successful. That’s a main attraction of municipal bonds.
It’s also key to be in the game. Waiting on the sidelines trying to make sense of the financial headlines is fruitless and unnecessary.
Consistency in muni investing
Municipal issuance was down in March, a fact analysts attributed, in part, to uncertainty leading up to the March 15 Fed meeting and mixed signals over Washington’s budget and tax priorities.
There’s also hypothesizing over whether the tax exemption on interest from munis will be eliminated or changed (“Voices Growing Louder on Muni Tax Exemption”).
Perhaps the failure to repeal the Affordable Care Act might somehow affect the exemption?
There’s a lot to chew on in these and other recent news items, but it shouldn’t interfere with investment decisions.
Lost amid the avalanche of information and conjecture is the central goal of municipal bond investing: generating tax-free income.
Sometimes the market price of bonds will rise, and other times it will fall.
Along the way, investors will be paid a steady stream of tax-free income.
When their bonds mature or are called, their principal is returned.
When is the best time to invest? It’s simple: When you have the funds. Put your money to work.
Above all, avoid distractions. Keep your eye on the ball.