It is becoming increasingly clear that municipal bonds offer unusual value in today’s financial environment. Experienced bond investors are feasting on tax-equivalent yields that are more than double those of Treasuries, well aware of the municipal bond market’s historic track record for safety and dependability.
We are also witnessing traditional equity investors dipping their toes into the tax-free bond market for the first time. Many have determined that they applied the “buy and hold” strategy to the wrong market and, despite the biggest bull market in history, find their account values below where they were 10 years ago.
Questions from new investors
Although they recognize the opportunity, some of these newcomers to the bond market are raising questions in two important areas.
With the expansion of government programs, some are anxious about the potential for rising interest rates down the road, which they fear may impact the value of their bonds. Others are concerned they lack the knowledge to select bonds that are right for them.
To the novice bond investors seeking to reason their way through these turbulent times, we offer a bit of common sense advice.
First, lose the stock investor’s mentality. Bonds are purchased for the income, not capital gains. Don’t attempt to time the market. Having spent 35 years in the business of buying and selling bonds, we have never seen anyone accurately predict the direction of interest rates for any reasonable period of time.
Our philosophy has always been to recommend well secured long-term bonds which maximize tax-free income. After all, that’s the reason to buy tax-free bonds in the first place. Long-term bonds enable investors to earn as much reinvestable income as possible. This with the knowledge that over the life of the bonds they will sometimes be worth less than you paid for them, and sometimes more. Municipal bond investors rarely sell their bonds.
Beware of bond funds and bond managers
Many financial publications recommend the purchase of bond funds, which theoretically absolves them and you of the burden of selecting individual bonds.
If there is a lesson to be learned in the aftermath of the recent financial system meltdown and the revelations of fraud surrounding once-trusted financial advisors and money managers, it is that ultimately you, the individual investor, will be responsible for your own financial well-being. In the words of George Santayana, “Those who cannot remember the past are condemned to repeat it.”
This is the market for buy and hold
Our experience has taught us that individuals do not need a “bond manager” to produce a portfolio that provides safety and a steady stream of tax-free income. In fact, we have never seen a managed bond account or bond mutual fund which, after accounting for fees and costs, has produced better results than simply owning the municipal bonds themselves.
Like other brokerage firms, FMSbonds is in business to earn a profit. But we do not think you need us, or anyone else, to manage your bonds. Our approach is simple. We assist our clients in purchasing quality bonds with excellent tax-equivalent returns. Then we advise them to leave them alone. An individual continually buying and selling bonds in his portfolio is doing himself a disservice. There may be situations that dictate selling a bond, but they should be based on common sense reasons that are easily understood by the investor.
Think quality, rate of return
When it comes to tax-free bonds, think quality first and then maximize your rate of return. If you are not sure, use Moody’s and Standard & Poor’s ratings as a guide.
Avoid brokerage firms that have just discovered bonds themselves because their other products are out of favor. Work with a firm that specializes in municipal bonds and has a proven track record for expertise and integrity.
More important: Trust yourself. Common sense is the prime requisite for successful bond investing. As another sage said, “Fool me once. . . .”