When you think about it, it’s staggering.
For at least a decade, billions of investable dollars have languished in tax-free money market funds earning next to nothing.
Actually, less than nothing.
At today’s rates (.01%), an investor with $100,000 parked in a tax-free fund for a year will earn a grand total of $10.00. Factor in inflation, which is at about 1.70%, and investors are actually paying $1,690 for the privilege of watching their money shrink. Ouch.
What has compelled so many people to sit on so much cash for so long?
‘Head for the hills’
Take a stroll with us down memory lane, back to when the financial media and well-known Wall Street brokerages began telling investors to head for the hills (read: money-market funds) because rates were about to spike.
If you were Rip Van Winkle and took a nap a decade ago, you’d wake up today with the same headlines:
“How to Buy Bonds in a Rising-Rate World,” exclaimed a recent article in The Wall Street Journal.
“Rising Interest Rates Will Be a Mixed Bag for Consumers Next Year,” predicted a prominent financial news site.
“How to Profit From Today’s Rising Interest Rates,” another site offered, under the heading of “Income Investing.”
Investors who have been heeding this Chicken Little hysteria, are now on a decade-long losing streak as they wait… and wait… for that one perfect moment to put their funds to work.
By the way, they will never recoup the income they have sacrificed, regardless of what happens to interest rates in the future.
Entertainment masquerading as wisdom
Economists have always tried to predict interest-rate movements; there are important business reasons to do so.
Our beef is with brokerages who get into the act and use their prognostications to guide fixed-income investors, without regard to the pain they may be inflicting.
“After a lengthy bull run, now might be a good time to start selling some of your muni bonds,” a Barron’s article stated, summarizing a report by a major Wall Street firm.Specifically, the firm advocated selling “25- to 30-year munis with sub-5% coupons.” The year was 2012.
Sixteen months later, Barron’s quoted the same brokerage, this time with a new headline: “It’s Time to Buy Munis Again.”
An income investor should buy and sell bonds, like a stock? We find this advice astounding.
Wrong on many counts
First, they obviously guessed wrong on rates, as yields today on 30-year triple-A bonds are hovering around 3.00%. Worse, they advocated selling long-term bonds, where the most tax-free income is generated.
The cardinal sin, however, is their push for income investors to interrupt their flow of… you guessed it… income and instead add their money to the stockpile of money-market funds leaking value.
This buy-and-sell advice is common among brokerages and toxic to portfolios. If you’re interested in more examples, hop on the Web and see for yourself. Misguided and contradictory advice abounds.
Implicit in all these forecasts is the concept that the bond market can and should be timed, a notion that fundamentally misconstrues the role of municipal bonds.
Investors buy munis for the steady stream of tax-free income. They don’t trade bonds, looking for a “right” time to get in and out. Their goal isn’t to generate capital gains.They buy their bonds, collect tax-free interest, and continue to do so until their bonds are called or mature, at which time they reinvest the principal. Of course there are exceptions, but they are extremely rare.
Maybe it’s just too simple
Investors new to the market often ask us for the secret to successful bond investing.It’s simple: Invest when you have the funds. Focus on quality, first, then yield. Don’t interrupt your flow of tax-free income.
Cash on the sidelines? That belongs to investors following bad advice who are sacrificing tax-free income for an uncertain return at an unknown time. The money they lose will never be recovered.
Lamenting current interest rates? Mourn instead for the mountains of money earning a sad .01%.
We see it every day: Successful income investors don’t look back at yesterday’s yields, nor guess what they’ll be tomorrow. They find the best value today and put their money to work.