Forbes: Battle Volatility with Boring Muni Bonds

Forbes: Battle Volatility with Boring Muni Bonds

You’re getting next to nothing from the local banks (although I love this checking deal from Navigant Credit Union). Volatility is making short term equity investing unattractive. So where do you go for safety? With treasury bonds returning negatively when you account for inflation, you should look at boring, old municipal bonds for non-retirement account investments and here’s why:

Quality

If you buy Rhode Island bonds, your main concern is the issuer being unable to pay back debts. To this point, Rhode Island hasn’t suffered a major default on a muni bond, but that’s no guarantee for the future. A great way to hedge the risk of individual issues is to use a fund. For our fair state, that fund is the Narragansett Insured Tax-Free Income fund. If you’re worried about local finances, look to use a national fund or ETF.

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Yield

The current yield on the Narragansett Fund Y-Share is 3.8 percent. After the municipal bond scare near the end of 2010, the fund’s YTD return is roughly 5.7 percent due to a flight to safety. You may get a higher yield with individual issues, but you have to worry about more risk, expense to buy, and liquidity to get out.

Tax Exempt

Here’s the real selling point on municipal bonds – if you buy Rhode Island bonds, they’re exempt of federal and state income taxes. If you buy muni’s for any other states, usually they’re free of federal taxes. So, if you’re in Rhode Island’s highest tax bracket and get 3.5 percent on your muni bond, that’s the taxable equivalent of getting roughly 6 percent on a corporate bond. Even for those in a lower tax bracket, this investment may make sense as opposed to lower yield savings accounts or CD’s.

Right now, boring is good. With tax rates sure to rise, tax-free is looking great. Municipal bonds are the way to get boring and tax-free into your portfolio.  

Dan Forbes is the owner of Forbes Financial Planning and a Certified Financial Planner™ practitioner with over 10 years of experience in financial services. He is a graduate of Brown University.