Ca. Muni bond funds

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Changing
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Ca. Muni bond funds

Post by Changing »

I have a lot of money in Ca. Muni funds - intermediate - which are declining lately. Time to bail? What to do with the money? In 28% bracket I think.
PFInterest
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Re: Ca. Muni bond funds

Post by PFInterest »

you're up 4% YTD.

did something change with your long term plan?
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Changing
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Re: Ca. Muni bond funds

Post by Changing »

thanks for your answer....i am in sdcsx...yielding 1.8% and mdnlx yielding 1.56 %....but the Fidelity guy couldn't tell me immediately what the tax equivalent yield was....I'm in the 28% bracket so I supposed I can just do the math myself and hang on about a third but I'm not sure it works that way...
What I worry about is the the market risk posed by tax reform.....and the longish holdings.....intermediate. I guess I'm not sure how I figure how whether these are good investments compared with something really safe like treasuries...According to my statement they have only returned about 6 percent total over the 3 years we've owned them, but I guess tax free that isn't awful.
And of course, there is a tax to sell them.
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triceratop
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Re: Ca. Muni bond funds

Post by triceratop »

Changing wrote:thanks for your answer....i am in sdcsx...yielding 1.8% and mdnlx yielding 1.56 %....but the Fidelity guy couldn't tell me immediately what the tax equivalent yield was....I'm in the 28% bracket so I supposed I can just do the math myself and hang on about a third but I'm not sure it works that way...
What I worry about is the the market risk posed by tax reform.....and the longish holdings.....intermediate. I guess I'm not sure how I figure how whether these are good investments compared with something really safe like treasuries...According to my statement they have only returned about 6 percent total over the 3 years we've owned them, but I guess tax free that isn't awful.
And of course, there is a tax to sell them.
Treasuries of the same duration have similar term risk; they are certainly not "really safe" from anything except term risk.

Why is there a tax to sell them? Have you made substantial unrealized gains? Don't count interest, that is distributed to you and is taken out of NAV; you may owe very little to sell.

I see that you are in a fund, SDCSX, with an expense ratio of 0.58%. Why are you using that fund when far cheaper funds like VCADX [ Vanguard California Intermediate-Term Tax-Exempt Fund Admiral Shares ] exist, saving you 0.49% post-tax? You may have been set up in that fund by an advisor; depending on tax cost to sell it may be advisable to switch.

Do you mean 28% federal or 28% California + Federal (I don't think this is possible). The correct way to calculate a tax equivalent yield is with your state and federal marginal rates, since income from this fund is exempt from taxes on both, while, say a corporate bond is taxable federally and to the state.
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grabiner
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Re: Ca. Muni bond funds

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Changing wrote:thanks for your answer....i am in sdcsx...yielding 1.8% and mdnlx yielding 1.56 %....but the Fidelity guy couldn't tell me immediately what the tax equivalent yield was....I'm in the 28% bracket so I supposed I can just do the math myself and hang on about a third but I'm not sure it works that way...
Tax-equivalent yield = fund_yield/[(1-federal tax rate)*(1-state tax rate)]. Assuming a 9.3% CA rate, you would multiply by 1.54 to get tax-equivalent yield (and multiply Treasuries by 1.10 since they are exempt from state tax).

However, taxes aren't the only cost to be avoided. Those funds cost 0.58% and 0.69%. You could keep more of your money, with a lower-cost fund. Vanguard CA Long-Term Tax-Exempt yields 2.17% on Investor shares with 0.19% expenses, and 2.27% on Admiral shares ($50K minimum) with 0.09% expenses. All three of these funds hold bonds with the same yields before expenses, and thus investors believe they have about the same risk.

Alternatively, you could get the same return as your two funds with less risk, by holding Vanguard CA Intermediate-Term Tax-Exempt; it yields 1.64% on Investor shares and 1.74% on Admiral shares, but has a duration of only five years, so it will lose less if rates rise.
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Changing
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Re: Ca. Muni bond funds

Post by Changing »

Aha! So at least one of those is a high fee fund...I do have a gain for which I will have to pay capital gains...I guess I just have to do the math and figure how how much tax I have to pay to see where they are worth switching out of in favor of the lower cost vanguard mini funds. In general, the muni funds do still seem worth the trouble even with looking tax form in that the tax equivalent is anywhere from 2.5 - 3 per cent. Maybe. I couldn't see the fee anywhere I looked on those funds when I was trying to research this. My fidelity guy is no help. Now. I know why. I have a huge loss from a real estate sale so I think I will sell those funds and get the cheaper vanguard muni funds...
Or if you only have to give up a small amount of return to be in taxable shorter term bonds maybe that's the way to go. Maybe 1/2 a point? Back to he calculator...
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grabiner
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Re: Ca. Muni bond funds

Post by grabiner »

Changing wrote:Aha! So at least one of those is a high fee fund...I do have a gain for which I will have to pay capital gains...I guess I just have to do the math and figure how how much tax I have to pay to see where they are worth switching out of in favor of the lower cost vanguard mini funds.
I would suggest paying the capital-gains tax, as you'll probably have to pay it eventually anyway. Your long-term bond funds will sell the bonds when they are no longer long-term, and will realize capital gains when they do this; the reason their share prices have increased is that the bonds they hold have increased in value.
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Changing
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Re: Ca. Muni bond funds

Post by Changing »

it is v confusing to me....
for one thing....i'm having trouble finding the info on the funds and i guess it's because it was a proprietary fidelity fund...
but assuming the reported yields are net of fees in theory it doesn't make much difference which fund i'm in....
but my head is hurting trying to get even that info....when i look it up it seems that there is negative return...but that is return rather than yield and now i am back in the weeds i think......
why do i bother?
if i can find a nice CD paying a little less than the the tax equivalent then i am only giving up a half a percent or so for the market risk, right?
when i asked my fidelity advisor straight out whether he would be putting new clients in these intermediate ca. muni funds he said yes....
but then he tried to sell me annuities....
thank you for trying to help me....
bottom line is we had a fidelity managed account we dumped and now we have a very cluttered account i'd like to streamline but worry selling these bond funds....the bulk of our very conservative portfolio at just the wrong moment.....would be a big error.....
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TimeRunner
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Re: Ca. Muni bond funds

Post by TimeRunner »

Changing, maybe step back and post your portfolio, per: viewtopic.php?t=6212 to get suggestions on cleaning-up from the Bogleheads' mindhive.
Last edited by TimeRunner on Wed Jul 05, 2017 8:40 am, edited 1 time in total.
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grabiner
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Re: Ca. Muni bond funds

Post by grabiner »

Changing wrote:it is v confusing to me....
for one thing....i'm having trouble finding the info on the funds and i guess it's because it was a proprietary fidelity fund...
but assuming the reported yields are net of fees in theory it doesn't make much difference which fund i'm in....
The reported yields are net of fees, but they also depend on the yields of the underlying bonds. If two funds have equal yields but different expense ratios, the fund with the higher expense ratio holds bonds with a higher underlying yield, and thus more risk.
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Changing
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Re: Ca. Muni bond funds

Post by Changing »

So bottom line these funds are all losing value - the total return is being negatively affected by rising interest rates and possibility of tax reform - the tax equivalent yield is now a wash with Investments available with no
Market risk (as opposed to bond default risk) i.e. My cd or treasury would not decline in value as long as I hang on to it - the muni bond fund share prices are dropping - dragging total return prices - what is the value of hanging on if the tax advantage is overtaken by the market forces?
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Re: Ca. Muni bond funds

Post by inbox788 »

Changing wrote:we have a very cluttered account i'd like to streamline but worry selling these bond funds....the bulk of our very conservative portfolio at just the wrong moment.....would be a big error.....
FWIW, all these funds are fairly equivalent AFAIC. The chance of making a big error switching among these bond funds is slight. Just don't switch to different risk class assets. I'm with the Vanguard intermediate funds, but they've underperformed for whatever reason, despite the lower EF. I'm assuming it's some risk/duration issue, but nothing for me to worry about.

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
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Re: Ca. Muni bond funds

Post by Big Dog »

So bottom line these funds are all losing value -
VCAIX is up 3.4% since Jan 1....
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