Vanguard California Muni Bond safety in downturns?

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mike.li.uber
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Vanguard California Muni Bond safety in downturns?

Post by mike.li.uber » Tue Dec 25, 2018 4:03 am

Update on 12/25:

Thank you all for the comments and suggestions!

yes, I'd share some more context of my situation:

We are a couple in our late 30s and Fed tax bucket is 32%.

We want to work for another 15~25 years. We don't have big spend plan in next 5~7 years (like a new house, or private schools for kids).

ok, for the original AA question:
I sold an investment property in March, and got some liquidity. I put it in money market and started researching in this forum and got good advice from you guys at that time :D

During summer, I felt the US stock market all time high was scary (as a new newbie to investing), so I just put 10% on US equities, VGT and VTI, 85% on vanguard California muni tax exempt bonds and 5% as cash.

In Q3 and Q4, I've been gradually putting more in VTI & VGT and some BP (for its dividends), and now at a position of 20% US equity, 75% CA muni bonds and 5% cash.

Of course, got a hit by 13% loss on that 20% equity. CA muni (VCAIX) price is pretty stable (dropped a bit by rate hike news and recently all rebounded). so about 2.x% loss of the whole portfolio since doing serious investing in summer.

got about 6 dividend cycles (about $11K). still losing 15K this year, not too bad.

was doing AA yesterday, and suddenly realized I have 75% in VCAIX (and some VCITX for long term). It's too much muni bond and I started feeling nervous. If a big recession is coming whether the muni bonds can go bankrupt. if yes I would totally mess up then... So am asking about the safety concerns..

Im also thinking about a 18 months plan to AA for 40% bond (all CA muni still? or should be less?) and 60% equity (VTI and VGT still?) portfolio, and so looking for more comments and suggestions from this generous community :-)


--------------------------
Original Post:

Merry Christmas, everyone!

I have question about my AA...

Seems a big correction in the equity market is going on. I have put 75% of my portfolio to bond, 20% in US stock market, and 5% in cash.

On my bond part, I put it almost all in vanguard California intermediate muni bond (VCAIX) for tax efficiency (no Fed nor State tax).

However, could the CA muni bond fund be safe enough? a bit worried. the total VCAIX amount is about 900K.
Last edited by mike.li.uber on Tue Dec 25, 2018 7:15 pm, edited 2 times in total.

Call_Me_Op
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Re: Vanguard California Muni Bond safety in downturns?

Post by Call_Me_Op » Tue Dec 25, 2018 7:49 am

That fund may hold-up fine in the current turmoil - but generally speaking, you have a lot of your net worth tied-up in the bonds of a single state. That's not particularly diversified.

As far as whether it is "safe enough," you would need to be clearer as to what you mean.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Vanguard California Muni Bond safety in downturns?

Post by carolinaman » Tue Dec 25, 2018 8:08 am

This is a great recent article by Larry Swedroe on muni bonds. It focuses on all munis and does not address California specifically, but he does have a strong opinion about munis in general.
https://thebamalliance.com/blog/play-it ... muni-land/

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Re: Vanguard California Muni Bond safety in downturns?

Post by retiredjg » Tue Dec 25, 2018 9:02 am

I would not put so much of my bond allocation into tax-exempt bonds. And I would not hot have more than have of my tax-exempt bonds in one state specific bond.

Tax-exempt bonds are certainly not crazy risky, but the are somewhat riskier than taxable bonds and a state fund is riskier than a national fund.

If you have a 401k or an iRA, that would be a good place to hold some taxable bonds such as a total bond market index.

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Re: Vanguard California Muni Bond safety in downturns?

Post by Call_Me_Op » Tue Dec 25, 2018 9:06 am

retiredjg wrote:
Tue Dec 25, 2018 9:02 am
Tax-exempt bonds are certainly not crazy risky, but the are somewhat riskier than taxable bonds...
Do you really mean this as written? I would agree that they are riskier than treasuries, but not riskier than taxable investment grade bonds (as suggested by the lower default rate of munis).
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Vanguard California Muni Bond safety in downturns?

Post by welderwannabe » Tue Dec 25, 2018 9:11 am

carolinaman wrote:
Tue Dec 25, 2018 8:08 am
This is a great recent article by Larry Swedroe on muni bonds. It focuses on all munis and does not address California specifically, but he does have a strong opinion about munis in general.
https://thebamalliance.com/blog/play-it ... muni-land/
Great article. Thanks for sharing!
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Vanguard California Muni Bond safety in downturns?

Post by Clever_Username » Tue Dec 25, 2018 11:08 am

I have a portion of my portfolio in VCADX -- a small portion of my total savings is in not-tax-advantaged space and it is entirely in this fund (as part of overall asset allocation). If your primary concern is safety, you should go to a far more diversified holding, perhaps even Total Bond Market, paying the tax difference, which you can think of as a form of insurance.

That having been said, I am very worried about something else you said in your post:
mike.li.uber wrote:
Tue Dec 25, 2018 4:03 am
Seems a big correction in the equity market is going on. I have put 75% of my portfolio to bond, 20% in US stock market, and 5% in cash.
Was your portfolio already 75% bond, or did you lock in your losses in stocks by selling low to buy a ton of bonds? If you moved your allocation in response to recent market movements, you should be aware market timing is a losing game. You have no way of knowing if yesterday was the lowest stocks will be in your lifetime, for example.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.

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Re: Vanguard California Muni Bond safety in downturns?

Post by MrDrinkingWater » Tue Dec 25, 2018 12:21 pm

In answering your question, I'll assume you started on January 1, 2018, with your asset allocation (AA). It sounds like you are a risk-adverse investor, as well as a someone with a high-enough annual taxable income to prefer owning muni bonds. It is possible that you don't have a good choice of a bond fund to use advantageously in your 401(k), and you don't have enough space in your traditional IRA for all the bonds you want to own.

If you are going to stick with muni bonds for all your bond holdings, putting half into a national muni fund and half in VCAIX is what a lot of people do. Those folks believe that diversifying bond holdings across many states is a good thing. Some other folks will argue that you really aren't diversifying risk all that much by splitting your bond holdings this way. You can go either way and probably be fine.

To help forum members understand your situation better, it might be useful for you to explain why you think having 20% allocated stocks is right for you. That is the concern I see in reading your original post. You'll find a lot of research and analysis that suggests 30% is a good minimum for an overall stock allocation. If you are already retired and your retirement income is more than satisfactory (thanks to pensions and Social Security), a 20% stock allocation might be fine. But, if you are young and in the first few years of your career, you might consider taking on more risk by investing in equities.

Merry Christmas!
mike.li.uber wrote:
Tue Dec 25, 2018 4:03 am
Merry Christmas, everyone!

I have question about my AA...

Seems a big correction in the equity market is going on. I have put 75% of my portfolio to bond, 20% in US stock market, and 5% in cash.

On my bond part, I put it almost all in vanguard California intermediate muni bond (VCAIX) for tax efficiency (no Fed nor State tax).

However, could the CA muni bond fund be safe enough? a bit worried. the total VCAIX amount is about 900K.

stan1
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Re: Vanguard California Muni Bond safety in downturns?

Post by stan1 » Tue Dec 25, 2018 12:32 pm

Since you sound like an investor who has low willingness and need to take risk I would consider putting some of your taxable bond holdings into treasury bonds. Treasury interest is not taxed by states.

Personally I would be comfortable with up to around 25-30% of my portfolio in CA Tax Exempt Muni bonds. Some people would use national munis after that but I'd probably go straight to treasury bonds if my federal tax rate was 22% and my CA tax rate was 9.3%. Put another way I'd pay the small tax premium for more secure federal interest over additional municipal bond interest.

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Re: Vanguard California Muni Bond safety in downturns?

Post by retiredjg » Tue Dec 25, 2018 12:38 pm

Call_Me_Op wrote:
Tue Dec 25, 2018 9:06 am
retiredjg wrote:
Tue Dec 25, 2018 9:02 am
Tax-exempt bonds are certainly not crazy risky, but the are somewhat riskier than taxable bonds...
Do you really mean this as written? I would agree that they are riskier than treasuries, but not riskier than taxable investment grade bonds (as suggested by the lower default rate of munis).
Yes, I meant it as written. I'm not a bond guru by any means, but that is how I understand it.

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Re: Vanguard California Muni Bond safety in downturns?

Post by TIAX » Tue Dec 25, 2018 12:38 pm

What's the difference in taxable-equivalent yield between the CA muni fund and the national intermediate fund? I would guess it's less than .1 and would use the national fund.

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Re: Vanguard California Muni Bond safety in downturns?

Post by stan1 » Tue Dec 25, 2018 12:43 pm

TIAX wrote:
Tue Dec 25, 2018 12:38 pm
What's the difference in taxable-equivalent yield between the CA muni fund and the national intermediate fund? I would guess it's less than .1 and would use the national fund.
Tax equivalent yield varies under market conditions. If OP is in the California 9.3% marginal tax rate or higher, and plans to stay in California the rest of his or her life, I'd still go with the CA municipal fund up to about 25-30% of my assets. Agree if there's a moderate to high chance of relocation to another state it would be better to go with the national fund to avoid potential unnecessary capital gains taxes.

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Re: Vanguard California Muni Bond safety in downturns?

Post by TIAX » Tue Dec 25, 2018 12:53 pm

stan1 wrote:
Tue Dec 25, 2018 12:43 pm
TIAX wrote:
Tue Dec 25, 2018 12:38 pm
What's the difference in taxable-equivalent yield between the CA muni fund and the national intermediate fund? I would guess it's less than .1 and would use the national fund.
Tax equivalent yield varies under market conditions. If OP is in the California 9.3% marginal tax rate or higher, and plans to stay in California the rest of his or her life, I'd still go with the CA municipal fund up to about 25-30% of my assets. Agree if there's a moderate to high chance of relocation to another state it would be better to go with the national fund to avoid potential unnecessary capital gains taxes.
Is the difference generally less than .1? For example, now, assuming OP is in the 35% federal and 9.3% CA, the TE yield of the CA fund is 4.09% while the national fund is 4.03%. Seems unwise to take state-specific risk for little to no benefit.

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Re: Vanguard California Muni Bond safety in downturns?

Post by Artsdoctor » Tue Dec 25, 2018 1:05 pm

mike.li.uber wrote:
Tue Dec 25, 2018 4:03 am
Merry Christmas, everyone!

I have question about my AA...

Seems a big correction in the equity market is going on. I have put 75% of my portfolio to bond, 20% in US stock market, and 5% in cash.

On my bond part, I put it almost all in vanguard California intermediate muni bond (VCAIX) for tax efficiency (no Fed nor State tax).

However, could the CA muni bond fund be safe enough? a bit worried. the total VCAIX amount is about 900K.
So of course I have to ask: what do you mean by "I have put"? Did you go from a 75% equity allocation to a 25% equity allocation because of the market swings?

When you're investing in any bond fund, you'd want to pair the average maturity with your needs, roughly. So you'd want to ask yourself what your goal is here.

By virtue of your post's title, I'm presuming you're "parking your money" in the bond fund until you feel it's the right time to get back into more equities, during an "upturn." If this is the case, your portfolio as a whole will most likely suffer in the long run more than any ebbs and flows associated with investing in a single-state muni fund.

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Re: Vanguard California Muni Bond safety in downturns?

Post by stan1 » Tue Dec 25, 2018 1:19 pm

TIAX wrote:
Tue Dec 25, 2018 12:53 pm

Is the difference generally less than .1? For example, now, assuming OP is in the 35% federal and 9.3% CA, the TE yield of the CA fund is 4.09% while the national fund is 4.03%. Seems unwise to take state-specific risk for little to no benefit.
There have been times in the 2000s when it was higher. I no longer have the data, maybe someone else wants to dig it up. OP has not given us his tax rate but has indicated he has a very low risk tolerance. If he is retired or soon to be retired he may well be in a much lower federal tax bracket than that while still being in the CA 9.3% marginal bracket. Personally I find the current federal tax rates shift the risk/return balance closer to treasury bonds over muni bonds (lowers premium for "full faith and credit of US Government") if someone isn't in a very high federal tax bracket.

The optimal right decision can't be known in advance. Personally I think 25-30% of assets in CA muni bonds or 25-30% of assets in national muni is an acceptable decision for any long term CA resident. Or split the difference. I would not go higher than 25-30% of assets in any type of muni bond.

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Re: Vanguard California Muni Bond safety in downturns?

Post by quantAndHold » Tue Dec 25, 2018 2:34 pm

Munis are, in general, safer than corporate bonds. And as states go, the state economy has been strong, and CA munis are probably better than the average state. However, there’s definitely some risk under the covers. Given current rates, I’m thinking that the risk is uncompensated.

If this were me, I would swap out at least half the munis for treasuries. You pay federal tax, but still avoid state tax. And you diversify away a bunch of risk.

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Re: Vanguard California Muni Bond safety in downturns?

Post by retiredjg » Tue Dec 25, 2018 3:41 pm

TIAX wrote:
Tue Dec 25, 2018 12:53 pm
stan1 wrote:
Tue Dec 25, 2018 12:43 pm
TIAX wrote:
Tue Dec 25, 2018 12:38 pm
What's the difference in taxable-equivalent yield between the CA muni fund and the national intermediate fund? I would guess it's less than .1 and would use the national fund.
Tax equivalent yield varies under market conditions. If OP is in the California 9.3% marginal tax rate or higher, and plans to stay in California the rest of his or her life, I'd still go with the CA municipal fund up to about 25-30% of my assets. Agree if there's a moderate to high chance of relocation to another state it would be better to go with the national fund to avoid potential unnecessary capital gains taxes.
Is the difference generally less than .1? For example, now, assuming OP is in the 35% federal and 9.3% CA, the TE yield of the CA fund is 4.09% while the national fund is 4.03%. Seems unwise to take state-specific risk for little to no benefit.
The benefit of using the state fund is avoiding the 9.3% in CA state taxes. Or did I misunderstand your question?

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Re: Vanguard California Muni Bond safety in downturns?

Post by dognose » Tue Dec 25, 2018 4:41 pm

OP,

To answer your original question about the safety of the Vanguard Calif. IT Tax-exempt fund, just go to the Vanguard website and look at the long-term and cumulative performance results for this fund. The fund lost about two percent in total return in the last major downturn of 2008. The fund also lost less than one percent in two other years over the last decade. The losing years were followed by winning years in all cases. The fund also is widely diversified across Calif. municipal issuers, and is managed by Vanguard's extremely talented muni bond team.

In short, this is a very safe fund assuming you plan to hold it for at least a few years. I wouldn't lose any sleep over having all of my bond holdings in this fund.

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Re: Vanguard California Muni Bond safety in downturns?

Post by Call_Me_Op » Tue Dec 25, 2018 5:32 pm

retiredjg wrote:
Tue Dec 25, 2018 12:38 pm
Call_Me_Op wrote:
Tue Dec 25, 2018 9:06 am
retiredjg wrote:
Tue Dec 25, 2018 9:02 am
Tax-exempt bonds are certainly not crazy risky, but the are somewhat riskier than taxable bonds...
Do you really mean this as written? I would agree that they are riskier than treasuries, but not riskier than taxable investment grade bonds (as suggested by the lower default rate of munis).
Yes, I meant it as written. I'm not a bond guru by any means, but that is how I understand it.
Depends upon what kind of taxable bonds you are referring to. There are all kinds of taxable bonds - treasuries, agencies, and corporates - and a wide spectrum of credit quality for the corporates. Muni's are less safe than the treasuries and agencies, but generally speaking, safer than corporates. Of course, you can select a group of very safe corporates that are safer than a group of risky minis - and vice versa.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

Topic Author
mike.li.uber
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Re: Vanguard California Muni Bond safety in downturns?

Post by mike.li.uber » Tue Dec 25, 2018 8:01 pm

updated the post.

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