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Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

We are receiving many e-mails and phone calls from clients asking if we are recommending changes in asset allocation in the wake of the World Trade Center tragedy and what is now perceived to be a U.S. economy in recession.

Our response remains the same:

If you are committed to a successful, long-term investment strategy, frequent changes in approach are not only unnecessary, but are usually unwise.

Experience shows that it is impossible to outguess the direction of financial markets for any extended period of time. The prudent investor structures his investment portfolio to perform well in all economic climates. This is accomplished through balance and diversification, not knee-jerk reactions.

Although we have long extolled the virtues of tax-free bonds, we have never suggested that a client devote his entire investment portfolio to bonds.

The Dangers Of Forsaking Balance

Our readers and clients are aware that we became increasingly concerned that hype from the major brokerage firms and the financial media was influencing individuals to forsake traditional investment fundamentals and become disproportionately invested in equities, particularly technology stocks.

Unfortunately, the past year has provided a rude awakening for many investors.  We hope the pain will soon pass, but the lessons should never be forgotten.

Today, all major brokerage firms are actively marketing bonds, suggesting they should be in every investor’s portfolio for balance, stability and cash flow.

My father would call this “closing the door after the horse has already left the barn.”

If your stockbroker suggested buying bonds when the Bull was roaring, call and thank him.  If not, you might want to take his bond recommendations with a grain of salt.

In our March 2000 commentary, we opined that the Fed would win its war against excessive exuberance and technology stocks would be the victims.  At the same time, we predicted that all brokers would, overnight, become tax-free bond specialists.  We appear to be correct on both counts.

Bonds Are Not Stocks

If this is true of your stockbroker, and you are contemplating an investment in tax-free bonds, we suggest you seek assistance from a broker who specializes in this area.

The process for evaluating bonds is distinctly different from stock analysis.  Tax-free bonds also have characteristics and subtle nuances that distinguish one from another.

That is why a tax-free bond specialist is always available on our E-Desk to answer any questions you may have.

James A. Klotz

President

James A. Klotz is the President of FMSbonds, Inc.
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Sep 7, 2001

Please note that all investing entails risk. Fixed income securities are subject to risks that will affect their value prior to maturity. Some of these risks can be related to changes in market conditions, issuer creditworthiness, and interest rates. This commentary is not a recommendation to buy or sell a specific security. All references to tax-free income refer to U.S. federal income tax. Income earned by certain investors may be subject to the Alternative Minimum Tax (AMT), and or taxation by state and local authorities. Please consult with your tax professional prior to investing. For more information on these topics please click on the “Bond Basics” link below or search by keyword at the top of this page.