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<h3>James A. Klotz</h3>

James A. Klotz

A few years ago, we spoke with a reporter from Forbes magazine about a popular yet misguided muni portfolio strategy advocated since the Dark Ages by most investment professionals.

Laddering, we told the reporter, was bunk. Always has been.

We were reminded of the article that ensued during a visit to our office last week by a concerned investor. The gentleman, a highly successful entrepreneur, had followed the conventional wisdom offered by his longtime, big-box broker as he built his muni portfolio over many years.

The backbone of his strategy was – you guessed it – laddering. After perusing a few of our articles, including the Forbes piece – which he observed had withstood the test of time – he decided to pay us a visit.

“All I know is, the advice I got was very wrong,” he told us.

The wisdom of ignoring conventional wisdom

We assured him he’s not alone; we’ve heard similar regrets from investors since we started in this business almost 45 years ago, and we’re not surprised. After all, regardless of where you get your financial news, the discussion of munis is invariably framed by an equities mentality: What’s up, what’s down? When should I buy, when should I sell? It’s a mode of thinking that, despite its prevalence, is antithetical to successful municipal bond investing.

The concept of laddering a muni portfolio is predicated on another bad idea – foretelling interest rate changes, a task that, though impossible over any length of time, doesn’t seem to deter many people from trying.

How does that work in the real world? Consider the breathtaking comments of a money manager recently whose crystal ball consistently told him rates would rise – and then they didn’t:

“We find ourselves in this position and we don’t know what to do as investors,” he told The Wall Street Journal. “We are all terrified of rising interest rates and we are watching them fall.”

No wonder legions of smart and successful people are taken in by conventional wisdom. Most of the people who are supposed to know better don’t.

It’s simple

The hard truth is really simple and it’s as old as munis themselves: Buy them to generate a reliable stream of tax-free income when your investment dollars are available. Hold them. Don’t trade them. What the Fed might or might not do shouldn’t distract you.

If you’re looking for perspective, take a look at our News & Insight. In the few hundred articles that span many years, you will see a consistent message that has succeeded through a variety of economic conditions.

What you won’t find are guesses. We are not prognosticators, and we don’t expect you to be, either.

The next time you hear an elaborate strategy that depends on conjecture and defies the core reasons for buying municipal bonds – maximizing tax-free income – do what our new friend did: Choose not to participate.

Buy, hold, relax. Yes, it’s that simple.

James A. Klotz

President

James A. Klotz is the President of FMSbonds, Inc.
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May 23, 2014

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.