Muni as part of FI

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bhinvirginia
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Joined: Mon Feb 19, 2018 10:54 am

Muni as part of FI

Post by bhinvirginia »

Hi Everyone,

Following up on another thread, am in 70/30 with 30% in total bond. I’m in the 35% tax bracket and live in VA with a 5.75% state tax.

I’m considering PRVAX (TRP VA municipal) for a portion of my taxable. It seems like munis could be a good choice given my tax bracket.

I’m confused about how much in munis though? Would you suggest say a third of my FI allocation (10% of portfolio)?

Any rules of thumb on the proportion?
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happenstance
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Re: Muni as part of FI

Post by happenstance »

One rule of thumb, and the one I’ve personally adopted, is no more than 50% of the bond allocation in munis, and no more than 50% of the muni bond portion in a single state (i.e. 25% of the total bond allocation). Others say that with AAA-quality muni bonds, you can go higher.

PRVAX is only 9.5% AAA, has 17.99% BBB, and 2.4% below that. I’m not aware of VA’s overall financials (e.g. how funded are government-funded pensions), but that is also a factor to consider when choosing a state-specific muni fund. In 2018 Larry Swedroe wrote about some specific states that his firm won’t invest in.

A common suggestion is to put 50% of the muni allocation in a state-specific fund, and the other 50% in a national muni fund to dilute the single-state risk.
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bhinvirginia
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Re: Muni as part of FI

Post by bhinvirginia »

Thanks! Looks like I’m in the right target range. I looked at PRVAX bc it’s no transaction fee at fidelity. Another option is BHV (ishares VA muni). Do you think there is a difference between the two?
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happenstance
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Re: Muni as part of FI

Post by happenstance »

No, BHV is not like PRVAX; it’s a closed-end fund (not an ETF) and appears to use leverage to be long-short. I would not use this.

At Fidelity, it looks like UVABX (USAA Virginia Bond Fund Class A) is also no-fee and has higher-quality bonds, though it does have a higher ER (0.79%). There’s also the national muni bond fund FMBIX (Fidelity Municipal Bond Index Fund, ER 0.07%).
typical.investor
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Re: Muni as part of FI

Post by typical.investor »

happenstance wrote: Sat Sep 05, 2020 11:00 pm No, BHV is not like PRVAX; it’s a closed-end fund (not an ETF) and appears to use leverage to be long-short. I would not use this.
I use CEFs or actually an ETF that tracks an index of them XMPT) which weights heavier towards those selling at a discount. BVH is trading at a premium which I’d shy away from.

Strictly speaking BVH is leveraged (about 40%) but not short anything. That will make it much more volatile. So will being a CEF fund. The good side is the CEF doesn’t have to sell assets when people exit for whatever reason and you can buy at a discount or just continue to hold. Makes it tougher to get out at times too though as getting out in a sell-off would be OUCH.
MikeG62
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Re: Muni as part of FI

Post by MikeG62 »

OP, muni's pretty significantly overbought these days. Yields not all that inspiring. See here:

https://www.fmsbonds.com/market-yields/

They did improve a bit in the last week though.

Plus, potentially higher risk now than pre-pandemic given what has happened to state and local finances as a result of the impact of Covid-19. See article here (if a WSJ subscriber):

Risk Creeps Into Municipal Bond Market, Yet Prices Stay High
Rock-bottom yields leave risk-averse investors with few options
https://www.wsj.com/articles/risk-creep ... neyBeat_us

FWIW, I own a fairly large portfolio of individual muni bonds (three dozen of them actually) accumulated over many years. So, I am a muni bond investor. Fortunately I bought them when rates were much more attractive than current rates and have not bought a single new muni bond in over 24-months. There have been better places for my fixed income (note though that I do not have anything close to your Federal marginal tax rate).
Real Knowledge Comes Only From Experience
Topic Author
bhinvirginia
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Re: Muni as part of FI

Post by bhinvirginia »

Thanks all, I like the USAA option as well. It seems the consensus is to not go crazy with them. I will start with a small allocation. I had also read a Blackrock report that munis could see some volatility in the short-term.
retiredjg
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Re: Muni as part of FI

Post by retiredjg »

If you have a reason to hold some bonds in taxable, I think a small allocation to a state muni is fine. In most cases, I don't think it will accomplish much financially in the long run - with the exception of some of the very high tax states.

Sometimes people think they are getting something free by investing in a tax-exempt bond fund. It is not necessarily so. In a very general sense, a muni bond will act like a taxable bond after taxes. Sometimes one will pay a little more than the other and if you are willing to switch things around to chase the higher paying one, there is probably little harm in doing that. But just because the advantage may be held by munis now, don't think it is always that way. It might be the opposite next year.

I like the idea already mentioned (if one chooses or must hold bonds in taxable) of not holding more than half of your bonds in munis and no more than half of the munis in one state. I would not put 33% of my bonds in one state.
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grabiner
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Re: Muni as part of FI

Post by grabiner »

I wouldn't recommend the T. Rowe Price VA muni fund, because the tax savings are less than the expenses. The fund has 0.51% expenses, and an SEC yield of 1.49%, so its bonds yield 2%. A Vanguard fund of comparable risk, with 0.09% expenses, would have a 1.91% SEC yield, which would be a 1.80% yield after 5.75% VA tax. Vanguard doesn't have a fund of exactly this yield, but it has High-Yield Tax-Exempt (not a junk fund; it holds mostly A and BBB bonds) with a 2.19% yield and Long-Term Tax-Exempt with a 1.52% yield, so you can choose your risk level.

Given current yields, and your tax of 18.8% or 23.8% on qualified dividends, I do prefer munis in taxable and stocks in tax-deferred in your tax bracket.
Wiki David Grabiner
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