Muni Bond Risk?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
Wricha
Posts: 1014
Joined: Sun Mar 25, 2012 10:33 am

Muni Bond Risk?

Post by Wricha »

I have been accomulating muni bonds AA or higher for more then 15 years. I have over 100 different bonds and still buying. I try to avoid hospitals, states that are in trouble, etc. I plan on holding the bonds till maturity or called (most are 20+ year). No defaults to date. My question is, if I am happy with the returns how would you rate the risk of this investment? This is not my entire portfolio looking for risk feedback on this particular investment.
User avatar
Artsdoctor
Posts: 6063
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Muni Bond Risk?

Post by Artsdoctor »

Wricha,

This is clearly a huge topic and is being addressed in the morning papers, on Morningstar and Vanguard, in the financial press, and on this forum. As the pension underfundings and retiree health payments become more and more pronounced, you're going to see muni risk addressed more clearly in more venues.

Larry Swedroe, a Bogleheads contributor, will be your biggest source of knowledge and asset on this very topic. Take a look at his most recent posts. He's been invaluable.

Additionally, Vanguard has had two papers addressing muni funds versus individual munis which have been very helpful. You can search their website.

If you're really interested, FINRA and EMMA both have learning centers that address the muni risk topic. You probably know most of the information but I find their websites very useful.

The bottom line is that you will probably see increasing awareness of risk surface throughout the next decade as transparency increases; pension underfundings are now being taken into consideration by ratings agencies and I think you'll find that this is a work in progress.

Some believe that diversification can help decrease risk (for example, through a fund) and there is an argument to said for that.

At the very least, I'd recommend that you enroll in EMMA's alert system. You can enter your bonds and you'll see when downgrades and other warnings occur. The last thing you should do is just buy and forget about it. You'll need to keep up with your individual munis. And when you're buying them, don't just reach for yield and if you think you're getting a bargain, the chances are that the market knows something you don't.

Hope this helps.

Artsdoctor
User avatar
ofcmetz
Posts: 2465
Joined: Tue Feb 08, 2011 7:09 pm
Location: Louisiana

Re: Muni Bond Risk?

Post by ofcmetz »

Wricha wrote:My question is, if I am happy with the returns how would you rate the risk of this investment? This is not my entire portfolio looking for risk feedback on this particular investment.
Being happy with returns has almost nothing to due with us rating the risk of your investment. Each individual muni has its own risk involved. I don't think its possible to give you a better answer than this based on what you have provided. If you really want to learn a lot then I suggest reading The Bond Book by Annette Thau. After reading this book, I think I would only want to have a go at individual muni bonds with the help of a skilled adviser. The easiest way to have more time and not worry about the risk of each individual bonds is to hold a muni fund.
Never underestimate the power of the force of low cost index funds.
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Muni Bond Risk?

Post by grabiner »

A diversified portfolio of 100 municipal bonds, all rated AA or better, from a variety of issuers, should be a low-credit-risk investment. However, the long duration has high inflation risk; if you have a bond which will mature for $10,000 in 20 years, you don't know whether that $10,000 will pay one month's rent or five months' rent on a house. (This could also be viewed as interest-rate risk in the value of the bonds; if you have a 4% bond and muni rates rise to 8% because of inflation expectation, the bond will lose a lot of its value.)

You also have some liquidity risk if you need to sell the bonds before maturity; a bond with a market value of $10,000 might only be sold at $9700. If you have other liquid funds in your portfolio, this isn't a concern

Basically, your bond portfolio is similar to Vanguard Long-Term Tax-Exempt, which has a duration of 7.6 years (adjusted for call provisions). The fund is a bit more diversified, with 1160 bonds (but probably not 1160 different issuers), and has 94% of its bonds rated A or higher but only 59% rated AA or AAA
Wiki David Grabiner
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Muni Bond Risk?

Post by abuss368 »

I have read "The Bond Book" as noted above and while I found it to be informative it was also a challenge to stay motivated to read it! A little dry.

I have never invested in individual bonds (outside of some savings bonds years ago). We have always preferred the low costs, diversification, monthly income, and most of all simplicity of a bond fund.

Holding an individual bond for the long haul involves various complexities that I am not an expert at. A fund eliminates this.

Total Bond in tax advantaged and Intermediate Term Tax Exempt in taxable. One bond fund in each account.

Keep investing simple.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
Topic Author
Wricha
Posts: 1014
Joined: Sun Mar 25, 2012 10:33 am

Re: Muni Bond Risk?

Post by Wricha »

Thanks folks for imput very helpful. Artsdoctor will do as you advise.
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Muni Bond Risk?

Post by abuss368 »

Wricha wrote:Thanks folks for imput very helpful. Artsdoctor will do as you advise.

I always fall back on, and I should have noted above, the advice of Warren Buffett. If you are sleeping at night you are fine, if you are up, you are in the wrong investment.

The only investment that works if the one that works for you!
John C. Bogle: “Simplicity is the master key to financial success."
Post Reply