Bogleheads

[ilan1h]

Two years ago when setting up my portfolio I decided to put my entire bond holdings in munis. The rationale was as follows:
1. I wanted to reserve my tax-free accounts for other things
2. I live in CA (a high tax state)
3. I'm in the highest tax bracket possible.
4. I wanted to keep things simple
5. I wanted to maximize safety and minimize AMT

Therefore based on my AA I put about 30% of the entire portfolio in Vanguard Ca. LT munis admiral. However, over time I am beginning to realize that these holdings have not been as "safe" as I had hoped and now I have to lose sleep over the one aspect of my portfolio that I thought I would never have to think about. Now I have to think about monoline insurer defaults, failed bond auctions, hedge fund muni-Tbill swap strategies, failing jurisdictions in CA, supreme court judgments regarding taxability of various issues etc etc. This is not what I signed up for. As far as I see I have three options:

1. Stay the course and not worry about all this nonsense.
2. Invest more in my muni fund since Bill Gross and others claim that it's historically very low.
3. Put my bond portfolio in TBM instead of just munis
4. Tax loss harvest by selling the LT CA muni and buying interm. CA muni (I don't know if this is kosher or not)

[Gekko]

IMO, i would stay the course. appreciate/enjoy the substantially higher tax-free yields and keep reinvesting them. muni NAVs will eventually come back - maybe sooner than we all know. when the NAV is higher, i would then move a portion over to a less volatile fund and reallocate at that time.

good luck.

[Bob]

IMHO #4 is likely the best option. Reasons are that other bond types are probably not a lot better (less risky or better after tax returns), it holds your AA, you get near-term cash benefit (lower taxes next year) and both LT and IT bonds tend to move up and down similarly so both are down now and hopefully both trend up similarly later . Net, you likely would come out ahead.

Just so you know, I just did this myself last year (in another state with income taxes), so I sure hope it is the right thing!

[dave.d]

It's best if you've held muni fund shares for 6 months before tax-loss harvesting. Otherwise a portion of the loss will be disallowed, equal to the tax-exempt interest you've received on those shares.

[ajwells]

I am right there with you... big long term holder of VG LT CA Muni fund with a big loss that its hard to just do nothing with... part of me wants to avoid more losses while the other part says the market is punishing these things so far beyond their long term value that adding might be the right course

I was asking about the exchange between the LT and IT VG fund and some thought it would avoid the wash rule while others thought it was substantially similar enough to be questioned by the IRS... does anyone have a definitive opinion about this?

Ajw

[larryswedroe]

First
If you are holding equities in the tax advantaged account, other than REITs, you likely have your location backwards
REITs and CCF are about the only assets you want it tax advantaged if have choice, other than fixed income.


Second, TLH is always a good idea if the amount is significant--and you might want to take this opportunity to get out of the location mistake (assuming it is one) and own taxable bonds in the tax advantaged and tax efficient equities in taxable

[EmergDoc]

TLH is a great idea, then you can restructure your portfolio in a more tax-efficient manner (bonds in tax-protected.) If you still need bonds in taxable, I like the intermediate CA Munibond idea.
_________________
1) Invest you must 2) Time is your friend 3) Impulse is your enemy
4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

[ajwells]

I understand the idea of equities in taxable accounts, but what about those nuts like me who like actively managed stock funds? Those are hard to hold in a taxable account and the tax sheltered account gets filled up with those funds and LSBDX, which gives me about 15% of my bond exposure... to get to my target 30% bond allocation I have to use a CA tax exempt fund in the taxable account or I would have very little allocation to bonds... of course I could up my LSBDX percentage in tax-deferred but I would rather have more equities in my retirement portfolio (I'm 45)

Ajw

[Mel Lindauer]

IMO, having one's entire bond allocation in the muni issues of a single state is both undiversified and risky.

Regards,

Mel

[ilan1h]

[Wagnerjb]

Larry said:

[ilan1h]

I am holding a banking index fund (KBE) in my non-taxable account as well as REIT's (VNQ). The reason why I put KBE in non-taxable is that it generates a high yield.

[baw703916]

Hi ilan1h,

I don't know if you've done anything yet, but CA LT tax-exempt is up almost 2% in the last two days. There's something to be said for staying the course through the panic and then revising your asset mix when things calm down.

Best wishes,
Brad
_________________
I don't foresee any Black Swans appearing in the future

[ilan1h]

Thanks Brad,
But regardless of whether munis are up I still thought it was a wise idea to lock in the losses. I sold the entire position and bought the intermediate CA muni instead. This way I can stay in munis and was able to harvest a loss.