Too many people know too little about municipal bond investing.
That’s the takeaway from an online survey of 2,000 adults queried on their knowledge of various fixed-income investments, including munis.
The 29-question survey, conducted last summer, probed a wide range of investors. When it came to munis, 45% said they didn’t understand them “at all,” according to Investment News, a publication for investment advisers.
Having been in the market for many decades, this lack of insight is disappointing, though not surprising. Most disconcerting, though, is the potential impact on investors’ ability to choose and use the right mix of securities to meet their financial objectives.
The right context in municipal bond investing
Much of the lack of understanding in municipal bond investing stems from the popular discussion of munis. It’s dominated by commentators bent on framing the municipal bond market in the same terms as equity markets (“Municipal Bond Risk and a Good Night’s Sleep,” “Seeking Steady Streams Amid Wild Swings”).
With an abundance of TV time to fill and virtually limitless capacity on the web, soothsayers have plenty of motivation and opportunity to turn up the volume on an otherwise quiet and simple investment.
This is terribly unfortunate because the thrills and chills of stock picking is the antithesis of successful bond investing. In fact, if muni investors are experiencing a roller-coaster ride, it’s an anomaly and likely the result of poor information.
Know the goal
The key point to remember is that while equity investing primarily seeks capital gains, the chief goal of municipal bonds is to generate tax-free income.
For investors in individual issues, market fluctuations are expected – and beside the point. Sometimes their munis will be worth more on paper than they paid for them, and sometimes less. When their bonds mature or are called, their principal is returned.
Tax-free income – and the ability to keep it flowing – is what matters.
Other popularly discussed yet futile concepts in muni investing include attempts to time the market or outguess the Fed. Both are impossible to do on a sustained basis.
Keep it simple: When selecting bonds, consider their credit quality and know the answer to a simple question: How will I get paid?
A lack of knowledge or the inability to find suitable bonds should never be an obstacle for investors who want to succeed in the market, balance their portfolio and realize their financial aims.
Yes, with the right focus, it’s simple to keep your interest clock ticking.