Munis vs. other "safe" investments?

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ilan1h
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Munis vs. other "safe" investments?

Post by ilan1h »

Most of my bond holdings are in CA int munis and national interm munis due to high state and federal tax brackets. Overall, have been very happy with the peace of mind and relatively smooth ride that these give. Overall tax equivalent yield YTD of about 6%. During the pandemic I sold off a lot of my equity holdings (a mistake) and subsequently have lots of money sitting in cash. At the age of 60 I have saved enough to live a comfortable retirement, send my kids to college etc. In short, I am in the enviable position of not having to worry about finances and am focused more on asset preservation. At this point, am wondering whether to put more cash into CA interm munis, or other "safe" investments such as short term muni fund (VWSTX), short term inv grade (VFSTX) etc. My tax deferred accounts are maxed out so my question refers to taxable money only. The muni funds have overall been extremely safe and dependable over the years and I have never sweated the maximum 4-6% dips that they encounter at the worst times. However, am now particularly worried and confused about the health of California going forward. It seems like a very poorly managed state with extremely high tax rates across the board. It was the first to lock down and the latest to open its economy. Not sure if going forward its economy will severely underperform for years to come or if it will bounce back quickly. I am tempted to forego the state tax advantage and invest in the national interm muni fund instead. Or possibly to veer away from Munis since they already constitute 40% of my net assets. Any advice appreciated.
Seasonal
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Re: Munis vs. other "safe" investments?

Post by Seasonal »

How much are you saving by using a CA fund rather than the other funds you are considering? Diversification is safer, but it depends on the cost.

"It seems like a very poorly managed state with extremely high tax rates across the board."

I've been reading predictions of disaster for CA for a long time. Taxes and spending policy have been a very frequent source of complaint, but the promised disaster has yet to emerge. I'd be more worried about the pandemic and the effects of climate change, such as fires.

"It was the first to lock down and the latest to open its economy."

Actions to protect public health would seem like evidence of good management. It really depends on the details of implementation.
GaryA505
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Location: New Mexico

Re: Munis vs. other "safe" investments?

Post by GaryA505 »

ilan1h wrote: Sat Sep 12, 2020 1:08 pm Most of my bond holdings are in CA int munis and national interm munis due to high state and federal tax brackets. Overall, have been very happy with the peace of mind and relatively smooth ride that these give. Overall tax equivalent yield YTD of about 6%. During the pandemic I sold off a lot of my equity holdings (a mistake) and subsequently have lots of money sitting in cash. At the age of 60 I have saved enough to live a comfortable retirement, send my kids to college etc. In short, I am in the enviable position of not having to worry about finances and am focused more on asset preservation. At this point, am wondering whether to put more cash into CA interm munis, or other "safe" investments such as short term muni fund (VWSTX), short term inv grade (VFSTX) etc. My tax deferred accounts are maxed out so my question refers to taxable money only. The muni funds have overall been extremely safe and dependable over the years and I have never sweated the maximum 4-6% dips that they encounter at the worst times. However, am now particularly worried and confused about the health of California going forward. It seems like a very poorly managed state with extremely high tax rates across the board. It was the first to lock down and the latest to open its economy. Not sure if going forward its economy will severely underperform for years to come or if it will bounce back quickly. I am tempted to forego the state tax advantage and invest in the national interm muni fund instead. Or possibly to veer away from Munis since they already constitute 40% of my net assets. Any advice appreciated.
I'm in a similar situation (though I'm a little older than you) as I have "won the game". I have almost all of my taxable account (about 1/3 of my total assets) in Vanguard High-Yield Tax Exempt VWALX. Despite the naysayers this fund has served me very well and I sleep just fine. When I start SS I may re-evaluate this investment due losing some of the income tax benefit, but for now I'm letting it ride. I plan to keep about 20% in VWSTX in case VWALX is temporarily in the sewer just at the time when I want to take a withdrawal.
BogleFan510
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Re: Munis vs. other "safe" investments?

Post by BogleFan510 »

I would consider carefully what sources of news you are relying on about the state not performing well or being managed poorly. Certain networks seem to have a political agenda with regard to discussing state finances. There are objective facts about the state's economy (it is essentially a medium sized country in economic strength) and none that I know of point to pending disaster. Much financial news is noise, as this site often points out.

No one can completely predict the future, but the bond rating agencies and interest rates being paid are still among the best ways to assess the riskiness of assets and I am seeing all time low yields.

I have very conservative friends who held high level state positions under both governors from each of the two major parties. Their assessment is that state revenues took some hits, but the overall tax base and revenue is quite relatively healthy, assuming no virus based sea change in society (like real estate tax revenues dropping dramatically from asset prices collapsing below prop 13 levels). I mean look at the share prices of state based tech companies. Where is all that Tessla, NVidia, Facebook, Apple employee share selling revenue being created? Most credible studies of whether low tax, trickle down economics actually work have suggested that economic wealth creation prefers a stable environment which is correllated with the higher taxes necessary to maintain stable social systems, rule of law, infrastucture, etc., not the opposite.

In summary, my opinion is that muni bonds remain a solid asset class. Slightly elevated risk of defaults, perhaps. Even my Puerto Rico muni bonds have done ok, and look how awful that poor place suffered. Even with lots of defaults investors recovered roughly 75 cents of par, I would guess, with many years of above average yield. My insured ones are still paying 5%+ coupons!

Note: This post is not intended as legal, financial or accounting advice, please consult with qualified advisors.
Last edited by BogleFan510 on Sat Sep 12, 2020 1:55 pm, edited 2 times in total.
Topic Author
ilan1h
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Re: Munis vs. other "safe" investments?

Post by ilan1h »

I looked at other "safe" investments such as Vang short-term inv grade (VFSTX), Vang ltd term muni (VMLUX) , Vang short term muni (VWSTX) and Vang ST corp bond (VSCSX). I compared their tax equivalent yields, Max drawdown etc. I then compared all of those to the Vanguard interm. muni funds. Bottom line, since 2002 the int. muni funds performed far better than the other ones with a very acceptable safely profile. For example, the worst year was -2% and the max drawdown was -5%. So, for people in the max tax brackets (fed and/or CA) I think that the int. muni funds are a far better investment. Just as an illustration: VFSTX had a CAGR of 3.4% compared to 6-7% on the int muni funds. In addition, it was more volatile. Looking at VSCSX it did 3.1% vs. 7-8% for the int. munis since 2011. It had a slightly less volatile profile but not enough to justify the difference in return.

My conclusion is that when looking for safety in a fund, the int. muni funds have trounced the others while keeping volatility fairly low. Of course, this analysis is mainly for high tax bracket individuals. When I evaluated the difference in the CA int. muni fund vs. the national one, the CA fund gave another full point in CAGR for CA residents (not insignificant). The risk profiles were almost identical. Of course, there is the added risk of investing in one state vs. many states. I already have a very large amount of my assets in these interm muni funds so I was hoping to diversify to something else. Nonetheless, I am veering towards piling further into these funds. Any opinions?
hudson
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Re: Munis vs. other "safe" investments?

Post by hudson »

ilan1h wrote: Sat Sep 12, 2020 1:08 pm I am tempted to forego the state tax advantage and invest in the national interm muni fund instead. Or possibly to veer away from Munis since they already constitute 40% of my net assets. Any advice appreciated.
ilan1h,

I personally wouldn't go over 40% muni. Here's Bill Bernstein on safe investments and munis: viewtopic.php?p=5160087#p5160087
For safe assets, I like CDs, and treasuries. In a few years I may move to TIPS.
I think that Baird's Intermediate Muni is worth a look for national funds as it is all AAA/AA/Prefunded. Is there a safer fund?
Topic Author
ilan1h
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Re: Munis vs. other "safe" investments?

Post by ilan1h »

Thanks Hudson. If I'm understanding Bernstein's main point: he is referring to monies needed for emergencies and living expenses. I agree that if this money is earmarked for those purposes I would play it safer. However, I already have CD's and cash to cover those basic expenses and therefore the monies I am referring to can take on a bit more risk.
hudson
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Re: Munis vs. other "safe" investments?

Post by hudson »

ilan1h wrote: Sat Sep 12, 2020 5:51 pm Thanks Hudson. If I'm understanding Bernstein's main point: he is referring to monies needed for emergencies and living expenses. I agree that if this money is earmarked for those purposes I would play it safer. However, I already have CD's and cash to cover those basic expenses and therefore the monies I am referring to can take on a bit more risk.
I agree. Then the Vanguard Intermediate Muni or Baird Intermediate Muni would be worth a look. Also maybe look at Vanguard's long muni fund or the equivalent for part of your solution.
palanzo
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Re: Munis vs. other "safe" investments?

Post by palanzo »

ilan1h wrote: Sat Sep 12, 2020 3:40 pm I looked at other "safe" investments such as Vang short-term inv grade (VFSTX), Vang ltd term muni (VMLUX) , Vang short term muni (VWSTX) and Vang ST corp bond (VSCSX). I compared their tax equivalent yields, Max drawdown etc. I then compared all of those to the Vanguard interm. muni funds. Bottom line, since 2002 the int. muni funds performed far better than the other ones with a very acceptable safely profile. For example, the worst year was -2% and the max drawdown was -5%. So, for people in the max tax brackets (fed and/or CA) I think that the int. muni funds are a far better investment. Just as an illustration: VFSTX had a CAGR of 3.4% compared to 6-7% on the int muni funds. In addition, it was more volatile. Looking at VSCSX it did 3.1% vs. 7-8% for the int. munis since 2011. It had a slightly less volatile profile but not enough to justify the difference in return.

My conclusion is that when looking for safety in a fund, the int. muni funds have trounced the others while keeping volatility fairly low. Of course, this analysis is mainly for high tax bracket individuals. When I evaluated the difference in the CA int. muni fund vs. the national one, the CA fund gave another full point in CAGR for CA residents (not insignificant). The risk profiles were almost identical. Of course, there is the added risk of investing in one state vs. many states. I already have a very large amount of my assets in these interm muni funds so I was hoping to diversify to something else. Nonetheless, I am veering towards piling further into these funds. Any opinions?
Can you provide a link to the CAGR of these funds? Thanks.
Topic Author
ilan1h
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Re: Munis vs. other "safe" investments?

Post by ilan1h »

palanzo wrote: Sat Sep 12, 2020 6:35 pm
ilan1h wrote: Sat Sep 12, 2020 3:40 pm I looked at other "safe" investments such as Vang short-term inv grade (VFSTX), Vang ltd term muni (VMLUX) , Vang short term muni (VWSTX) and Vang ST corp bond (VSCSX). I compared their tax equivalent yields, Max drawdown etc. I then compared all of those to the Vanguard interm. muni funds. Bottom line, since 2002 the int. muni funds performed far better than the other ones with a very acceptable safely profile. For example, the worst year was -2% and the max drawdown was -5%. So, for people in the max tax brackets (fed and/or CA) I think that the int. muni funds are a far better investment. Just as an illustration: VFSTX had a CAGR of 3.4% compared to 6-7% on the int muni funds. In addition, it was more volatile. Looking at VSCSX it did 3.1% vs. 7-8% for the int. munis since 2011. It had a slightly less volatile profile but not enough to justify the difference in return.

My conclusion is that when looking for safety in a fund, the int. muni funds have trounced the others while keeping volatility fairly low. Of course, this analysis is mainly for high tax bracket individuals. When I evaluated the difference in the CA int. muni fund vs. the national one, the CA fund gave another full point in CAGR for CA residents (not insignificant). The risk profiles were almost identical. Of course, there is the added risk of investing in one state vs. many states. I already have a very large amount of my assets in these interm muni funds so I was hoping to diversify to something else. Nonetheless, I am veering towards piling further into these funds. Any opinions?
Can you provide a link to the CAGR of these funds? Thanks.
I used Portfoliovisualizer and plugged in the values. That's what I got.
UpperNwGuy
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Re: Munis vs. other "safe" investments?

Post by UpperNwGuy »

ilan1h wrote: Sat Sep 12, 2020 1:08 pm However, am now particularly worried and confused about the health of California going forward. It seems like a very poorly managed state with extremely high tax rates across the board. It was the first to lock down and the latest to open its economy. Not sure if going forward its economy will severely underperform for years to come or if it will bounce back quickly. I am tempted to forego the state tax advantage and invest in the national interm muni fund instead.
Good grief! What news programs have you been watching? California is one of the better managed states. Turn off your TV and stay the course.
palanzo
Posts: 1364
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Re: Munis vs. other "safe" investments?

Post by palanzo »

ilan1h wrote: Sat Sep 12, 2020 7:10 pm
palanzo wrote: Sat Sep 12, 2020 6:35 pm
ilan1h wrote: Sat Sep 12, 2020 3:40 pm I looked at other "safe" investments such as Vang short-term inv grade (VFSTX), Vang ltd term muni (VMLUX) , Vang short term muni (VWSTX) and Vang ST corp bond (VSCSX). I compared their tax equivalent yields, Max drawdown etc. I then compared all of those to the Vanguard interm. muni funds. Bottom line, since 2002 the int. muni funds performed far better than the other ones with a very acceptable safely profile. For example, the worst year was -2% and the max drawdown was -5%. So, for people in the max tax brackets (fed and/or CA) I think that the int. muni funds are a far better investment. Just as an illustration: VFSTX had a CAGR of 3.4% compared to 6-7% on the int muni funds. In addition, it was more volatile. Looking at VSCSX it did 3.1% vs. 7-8% for the int. munis since 2011. It had a slightly less volatile profile but not enough to justify the difference in return.

My conclusion is that when looking for safety in a fund, the int. muni funds have trounced the others while keeping volatility fairly low. Of course, this analysis is mainly for high tax bracket individuals. When I evaluated the difference in the CA int. muni fund vs. the national one, the CA fund gave another full point in CAGR for CA residents (not insignificant). The risk profiles were almost identical. Of course, there is the added risk of investing in one state vs. many states. I already have a very large amount of my assets in these interm muni funds so I was hoping to diversify to something else. Nonetheless, I am veering towards piling further into these funds. Any opinions?
Can you provide a link to the CAGR of these funds? Thanks.
I used Portfoliovisualizer and plugged in the values. That's what I got.
Thank you.
palanzo
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Re: Munis vs. other "safe" investments?

Post by palanzo »

UpperNwGuy wrote: Sat Sep 12, 2020 7:19 pm
ilan1h wrote: Sat Sep 12, 2020 1:08 pm However, am now particularly worried and confused about the health of California going forward. It seems like a very poorly managed state with extremely high tax rates across the board. It was the first to lock down and the latest to open its economy. Not sure if going forward its economy will severely underperform for years to come or if it will bounce back quickly. I am tempted to forego the state tax advantage and invest in the national interm muni fund instead.
Good grief! What news programs have you been watching? California is one of the better managed states. Turn off your TV and stay the course.
Good grief! Do you live in California?
Gleevec
Posts: 341
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Re: Munis vs. other "safe" investments?

Post by Gleevec »

palanzo wrote: Sat Sep 12, 2020 7:39 pm
UpperNwGuy wrote: Sat Sep 12, 2020 7:19 pm
ilan1h wrote: Sat Sep 12, 2020 1:08 pm However, am now particularly worried and confused about the health of California going forward. It seems like a very poorly managed state with extremely high tax rates across the board. It was the first to lock down and the latest to open its economy. Not sure if going forward its economy will severely underperform for years to come or if it will bounce back quickly. I am tempted to forego the state tax advantage and invest in the national interm muni fund instead.
Good grief! What news programs have you been watching? California is one of the better managed states. Turn off your TV and stay the course.
Good grief! Do you live in California?
I mean it’s only the world’s 5th largest economy and (with Seattle) home to all the companies that distinguishes the US economy from Europe while being the home to (along with Boston) the worlds leading research universities

But depending on your news source, California’s forest raking skills leave much to be desired— because you know that’s a thing

If Cali (or NY or TX or FL) muni crash the federal muni fund will crash too, so my view is have a mix of muni and treasuries
Seasonal
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Re: Munis vs. other "safe" investments?

Post by Seasonal »

The economy of California is the largest in the United States, boasting a $3.2 trillion gross state product as of 2019.[9] If California were a sovereign nation (2019), it would rank as the world's fifth largest economy, ahead of India and behind Germany.[10][11] Additionally, California's Silicon Valley is home to some of the world's most valuable technology companies, including Apple, Alphabet Inc., and Facebook.[12] In total, over 10% of Fortune 1000 companies were based in California in 2018, the most of any state.[13]

As both the most populous US state[14] and one of the most climatologically diverse states, the economy of California is varied, with many sizable sectors. The most dominant of these sectors include finance, business services, government and manufacturing. Much of the economic activity is concentrated in the coastal cities, especially Los Angeles, which has a relative focus on media—most notably Hollywood—and the San Francisco Bay Area, which predominantly concentrates on technology. Both cities, along with other major ports such as San Diego, also act as significant trade hubs to and from the United States. Furthermore, California's Central Valley is one of the most productive agricultural regions on Earth, growing over half the country's fruits, vegetables, and nuts.[15]
https://en.wikipedia.org/wiki/Economy_of_California
palanzo
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Re: Munis vs. other "safe" investments?

Post by palanzo »

Gleevec wrote: Sat Sep 12, 2020 7:49 pm
palanzo wrote: Sat Sep 12, 2020 7:39 pm
UpperNwGuy wrote: Sat Sep 12, 2020 7:19 pm
ilan1h wrote: Sat Sep 12, 2020 1:08 pm However, am now particularly worried and confused about the health of California going forward. It seems like a very poorly managed state with extremely high tax rates across the board. It was the first to lock down and the latest to open its economy. Not sure if going forward its economy will severely underperform for years to come or if it will bounce back quickly. I am tempted to forego the state tax advantage and invest in the national interm muni fund instead.
Good grief! What news programs have you been watching? California is one of the better managed states. Turn off your TV and stay the course.
Good grief! Do you live in California?
I mean it’s only the world’s 5th largest economy and (with Seattle) home to all the companies that distinguishes the US economy from Europe while being the home to (along with Boston) the worlds leading research universities

But depending on your news source, California’s forest raking skills leave much to be desired— because you know that’s a thing

If Cali (or NY or TX or FL) muni crash the federal muni fund will crash too, so my view is have a mix of muni and treasuries
Drought, the bark beetle and not clearing the forest floor for 50+ years are sadly all too real. If you are interested listen to the videos of Cal Fire crews who are trying to save houses.

https://abc30.com/record-129-million-tr ... -/2770243/

I'm not sure the 5th largest economy is going to bounce back quickly due to the impact on the economy of the pandemic and the fires.
illumination
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Re: Munis vs. other "safe" investments?

Post by illumination »

I don't think munis are priced appropriately for their risk level, but some here disagree. I wouldn't put all my eggs in one state basket, even if it was a state that I thought was making all the right moves in terms of fiscal management (and CA definitely does not make that list for me). And when states do go down a bad path, it's almost impossible to right the ship. Look at a state like Illinois or Kentucky, lots of bad decisions and voters seem to have no appetite to fix it.

I would find other forms of fixed income if this is a big position you are thinking of entering, even if it's not as tax advantaged. Or diversify among a lot of municipal debt. Vanguard's CA Intermediate Bond Fund is paying 0.8%, I'd gladly take the "hit" and be in some alternatives.
palanzo
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Re: Munis vs. other "safe" investments?

Post by palanzo »

ilan1h wrote: Sat Sep 12, 2020 1:08 pm Most of my bond holdings are in CA int munis and national interm munis due to high state and federal tax brackets. Overall, have been very happy with the peace of mind and relatively smooth ride that these give. Overall tax equivalent yield YTD of about 6%.
How did you achieve this? This does not seem possible in 2020.
typical.investor
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Re: Munis vs. other "safe" investments?

Post by typical.investor »

palanzo wrote: Sat Sep 12, 2020 8:33 pm
ilan1h wrote: Sat Sep 12, 2020 1:08 pm Most of my bond holdings are in CA int munis and national interm munis due to high state and federal tax brackets. Overall, have been very happy with the peace of mind and relatively smooth ride that these give. Overall tax equivalent yield YTD of about 6%.
How did you achieve this? This does not seem possible in 2020.
Not sure how they did, but XMPT which follows an index of municipal bond CEF funds (some of which use leverage and some of which are high yield) has a 30 day Tax equivalent SEC yield of exactly 6.00% as of 09/11/2020 for the 32% bracket.

It’s a bit volatile though and given they way people here often bail on munis when the road gets bumpy, I am not recommending it.

https://www.vaneck.com/etf/income/xmpt/overview/
palanzo
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Re: Munis vs. other "safe" investments?

Post by palanzo »

typical.investor wrote: Sat Sep 12, 2020 9:14 pm
palanzo wrote: Sat Sep 12, 2020 8:33 pm
ilan1h wrote: Sat Sep 12, 2020 1:08 pm Most of my bond holdings are in CA int munis and national interm munis due to high state and federal tax brackets. Overall, have been very happy with the peace of mind and relatively smooth ride that these give. Overall tax equivalent yield YTD of about 6%.
How did you achieve this? This does not seem possible in 2020.
Not sure how they did, but XMPT which follows an index of municipal bond CEF funds (some of which use leverage and some of which are high yield) has a 30 day Tax equivalent SEC yield of exactly 6.00% as of 09/11/2020 for the 32% bracket.

It’s a bit volatile though and given they way people here often bail on munis when the road gets bumpy, I am not recommending it.

https://www.vaneck.com/etf/income/xmpt/overview/
Yes, but the OP is holding mostly CA int munis and national interm munis and getting 6%?
Gleevec
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Re: Munis vs. other "safe" investments?

Post by Gleevec »

palanzo wrote: Sat Sep 12, 2020 8:22 pm
Gleevec wrote: Sat Sep 12, 2020 7:49 pm
palanzo wrote: Sat Sep 12, 2020 7:39 pm
UpperNwGuy wrote: Sat Sep 12, 2020 7:19 pm
ilan1h wrote: Sat Sep 12, 2020 1:08 pm However, am now particularly worried and confused about the health of California going forward. It seems like a very poorly managed state with extremely high tax rates across the board. It was the first to lock down and the latest to open its economy. Not sure if going forward its economy will severely underperform for years to come or if it will bounce back quickly. I am tempted to forego the state tax advantage and invest in the national interm muni fund instead.
Good grief! What news programs have you been watching? California is one of the better managed states. Turn off your TV and stay the course.
Good grief! Do you live in California?
I mean it’s only the world’s 5th largest economy and (with Seattle) home to all the companies that distinguishes the US economy from Europe while being the home to (along with Boston) the worlds leading research universities

But depending on your news source, California’s forest raking skills leave much to be desired— because you know that’s a thing

If Cali (or NY or TX or FL) muni crash the federal muni fund will crash too, so my view is have a mix of muni and treasuries
Drought, the bark beetle and not clearing the forest floor for 50+ years are sadly all too real. If you are interested listen to the videos of Cal Fire crews who are trying to save houses.

https://abc30.com/record-129-million-tr ... -/2770243/

I'm not sure the 5th largest economy is going to bounce back quickly due to the impact on the economy of the pandemic and the fires.
You can play that game for every state- Florida hurricanes and toxic bloom, Texas hurricanes and tornadoes,NY terrorist attacks and flooding so on.

[OT political comment removed by moderator oldcomputerguy], these are all resilient states and California will continue to drive the american economy upward— in fact without california or seattle the US economy would be the EU economy

https://www.fisherinvestments.com/-/med ... 6988CD072B
Topic Author
ilan1h
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Re: Munis vs. other "safe" investments?

Post by ilan1h »

Regarding how I got 6%. I was not referring to 2020. I was using a CAGR from 2002 to 2020. The CAGR during this time frame was 4.02%. The tax equivalent yield for someone who is in the 35% federal bracket and 12.3% CA state tax bracket is about 6%. I have held munis since 2002 and this has been the overall experience. Obviously there have been times (like now) where the yield is far lower.

Also, I was not commenting on the financial wealth that is located in CA but on the actual management of the state. Those are two very different things. CA has the highest taxes in the U.S but does not give good value for money. The schools are horrible, public services are marginal, cities such as L.A and S.F are absolutely inundated with homeless people and tent cities etc. CA is very often said to have the economy of France, but it certainly doesn't look like France. The environment for business is very poor and people are flocking out of the state. The situation is very similar to NY ie: NYC may have a lot of billionaires and financial companies but it doesn't mean that the city is well managed despite sky high state and local taxes.
palanzo
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Re: Munis vs. other "safe" investments?

Post by palanzo »

ilan1h wrote: Sun Sep 13, 2020 12:25 am Regarding how I got 6%. I was not referring to 2020. I was using a CAGR from 2002 to 2020. The CAGR during this time frame was 4.02%. The tax equivalent yield for someone who is in the 35% federal bracket and 12.3% CA state tax bracket is about 6%. Ily have held munis since 2002 and this has been the overall experience. Obviously there have been times (like now) where the yield is far lower.

Also, I was not commenting on the financial wealth that is located in CA but on the actual management of the state. Those are two very different things. CA has the highest taxes in the U.S but does not give good value for money. The schools are horrible, public services are marginal, cities such as L.A and S.F are absolutely inundated with homeless people and tent cities etc. CA is very often said to have the economy of France, but it certainly doesn't look like France. The environment for business is very poor and people are flocking out of the state. The situation is very similar to NY ie: NYC may have a lot of billionaires and financial companies but it doesn't mean that the city is well managed despite sky high state and local taxes.
CAGR is not yield so I'm not sure you can calculate a TEY like that. I think you are conflating returns and yield. Remember also this is during a period of falling rates so that return may not be achieved going forward.

I had to look it up. Both CA and France have a ~3 trillion GDP. France certainly is not CA in more ways than one. :mrgreen:
Valuethinker
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Re: Munis vs. other "safe" investments?

Post by Valuethinker »

ilan1h wrote: Sat Sep 12, 2020 1:08 pm Most of my bond holdings are in CA int munis and national interm munis due to high state and federal tax brackets. Overall, have been very happy with the peace of mind and relatively smooth ride that these give. Overall tax equivalent yield YTD of about 6%. During the pandemic I sold off a lot of my equity holdings (a mistake) and subsequently have lots of money sitting in cash. At the age of 60 I have saved enough to live a comfortable retirement, send my kids to college etc. In short, I am in the enviable position of not having to worry about finances and am focused more on asset preservation. At this point, am wondering whether to put more cash into CA interm munis, or other "safe" investments such as short term muni fund (VWSTX), short term inv grade (VFSTX) etc. My tax deferred accounts are maxed out so my question refers to taxable money only. The muni funds have overall been extremely safe and dependable over the years and I have never sweated the maximum 4-6% dips that they encounter at the worst times. However, am now particularly worried and confused about the health of California going forward. It seems like a very poorly managed state with extremely high tax rates across the board. It was the first to lock down and the latest to open its economy. Not sure if going forward its economy will severely underperform for years to come or if it will bounce back quickly. I am tempted to forego the state tax advantage and invest in the national interm muni fund instead. Or possibly to veer away from Munis since they already constitute 40% of my net assets. Any advice appreciated.
Informed knowledge about California's fiscal state is beyond me. I know the basics: it rivals Baden Wurtemburg in Germany as one of the richest regions in the world due in large part to success of entertainment & technology industries + ideal climate for agriculture etc.

Conversely the tax structure is overly reliant on direct (capital gains, income & payroll) taxes v indirect taxes (sales, property etc).

My own view is that you should measure your risk by taking credit rating agencies (Moody's, S&P, Fitch) at face value. Understanding that the chance of default for a given credit rating of municipal bond is much lower than for a corporate bond of same credit rating.

If you are uncertain, then you could invest 50% in a national municipal fund & 50% in a statewide California fund. In finance when faced w imponderables w too many unknowns this is often the best course of action.

Be aware that individual municipalities are problematic. Michael Lewis in his book Boomerang is v interesting in his description of fiscal problems that led to default in Ventura California.

So if you do hold such bonds it must be in a fully diversified fund.

I would not recommend holding bonds which are sub investment grade. The Rating agencies tend to be slow in downgrading their clients and thus these bonds could be well on way to default.
Topic Author
ilan1h
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Re: Munis vs. other "safe" investments?

Post by ilan1h »

palanzo wrote: Sun Sep 13, 2020 12:45 am
ilan1h wrote: Sun Sep 13, 2020 12:25 am
CAGR is not yield so I'm not sure you can calculate a TEY like that. I think you are conflating returns and yield. Remember also this is during a period of falling rates so that return may not be achieved going forward.
Yes, this is a good point. I was trying to figure out how to compare two investments over a long period of time with and without tax consequences. I looked at the data again but this time I used the final balance of an initial investment of $10,000 in 2002 with no taxes taken into account. All dividends, fees etc are included.

VCADX (interm CA muni)$22K vs. VMLUX (ltd term munis) $16K vs. VFSTX (short term inv grade) $19K

After MAX state and fed taxes the numbers are as follows:
VCADX $22K vs. VMLUX $14K vs. VFSTX $10K

There is also another way of viewing this data. PV gives you the ability to view "Trailing Returns ending in Aug 2020" for 10 years. Those numbers are:
VCADX 3.86% vs. VMLUX 1.87% and VFSTX $2.6%. Before taxes
VCADX 3.86% vs. VMLUX 1.63% and VFSTX $1.35% After taxes

So, no matter how you parse the data a CA resident in the max tax bracket is far better off with his state's interm muni fund than with a national ltd term fund or a ST inv grade fund.
palanzo
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Re: Munis vs. other "safe" investments?

Post by palanzo »

ilan1h wrote: Sun Sep 13, 2020 2:06 pm
palanzo wrote: Sun Sep 13, 2020 12:45 am
ilan1h wrote: Sun Sep 13, 2020 12:25 am
CAGR is not yield so I'm not sure you can calculate a TEY like that. I think you are conflating returns and yield. Remember also this is during a period of falling rates so that return may not be achieved going forward.
Yes, this is a good point. I was trying to figure out how to compare two investments over a long period of time with and without tax consequences. I looked at the data again but this time I used the final balance of an initial investment of $10,000 in 2002 with no taxes taken into account. All dividends, fees etc are included.

VCADX (interm CA muni)$22K vs. VMLUX (ltd term munis) $16K vs. VFSTX (short term inv grade) $19K

After MAX state and fed taxes the numbers are as follows:
VCADX $22K vs. VMLUX $14K vs. VFSTX $10K

There is also another way of viewing this data. PV gives you the ability to view "Trailing Returns ending in Aug 2020" for 10 years. Those numbers are:
VCADX 3.86% vs. VMLUX 1.87% and VFSTX $2.6%. Before taxes
VCADX 3.86% vs. VMLUX 1.63% and VFSTX $1.35% After taxes

So, no matter how you parse the data a CA resident in the max tax bracket is far better off with his state's interm muni fund than with a national ltd term fund or a ST inv grade fund.
Would you also not want to compare VWIUX National Intermediate Term TE? The results of VCADX vs. VMLUX are not too surprising. Duration rather than tax status.
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ilan1h
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Re: Munis vs. other "safe" investments?

Post by ilan1h »

Thanks. VWIUX final balance since 2002 after paying state tax was 19K. The 10 yr CAGR was 3.1% after taxes. So, over 10 years you would have lost about 13% of your comparable returns investing in the national vs. the state muni. Ostensibly there is more diversification in the national muni but not sure that that advantage is really worth it. They literally moved in lockstep with one another for 18 years.
visualguy
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Re: Munis vs. other "safe" investments?

Post by visualguy »

ilan1h wrote: Sun Sep 13, 2020 12:25 am CA has the highest taxes in the U.S but does not give good value for money. The schools are horrible, public services are marginal, cities such as L.A and S.F are absolutely inundated with homeless people and tent cities etc. CA is very often said to have the economy of France, but it certainly doesn't look like France. The environment for business is very poor and people are flocking out of the state. The situation is very similar to NY ie: NYC may have a lot of billionaires and financial companies but it doesn't mean that the city is well managed despite sky high state and local taxes.
You must be getting information from the wrong places. Many states have an overall higher tax burden than CA:

https://www.sacbee.com/news/politics-go ... 32781.html
https://wallethub.com/edu/states-with-h ... den/20494/

CA has many of the most successful businesses in the US, tremendous startup and venture capital activity, many successful entrepreneurs in a wide gamut of businesses, and it's a strong magnet for global talent. How can that be a "very poor environment for business"?

People aren't "flocking out of state". The CA population has grown by 7.3% over the last decade, which is higher than the national rate. Yes, some people are leaving, but others (of higher income actually) are arriving, and babies are born.

If there are reasons to worry about CA munis, they are not to be found in anything that you mentioned.
JackoC
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Re: Munis vs. other "safe" investments?

Post by JackoC »

palanzo wrote: Sun Sep 13, 2020 12:45 am
ilan1h wrote: Sun Sep 13, 2020 12:25 am Regarding how I got 6%. I was not referring to 2020. I was using a CAGR from 2002 to 2020. The CAGR during this time frame was 4.02%. The tax equivalent yield for someone who is in the 35% federal bracket and 12.3% CA state tax bracket is about 6%. Ily have held munis since 2002 and this has been the overall experience. Obviously there have been times (like now) where the yield is far lower.

Also, I was not commenting on the financial wealth that is located in CA but on the actual management of the state. Those are two very different things. CA has the highest taxes in the U.S but does not give good value for money. The schools are horrible, public services are marginal, cities such as L.A and S.F are absolutely inundated with homeless people and tent cities etc. CA is very often said to have the economy of France, but it certainly doesn't look like France. The environment for business is very poor and people are flocking out of the state. The situation is very similar to NY ie: NYC may have a lot of billionaires and financial companies but it doesn't mean that the city is well managed despite sky high state and local taxes.
CAGR is not yield so I'm not sure you can calculate a TEY like that. I think you are conflating returns and yield. Remember also this is during a period of falling rates so that return may not be achieved going forward.

I had to look it up. Both CA and France have a ~3 trillion GDP. France certainly is not CA in more ways than one. :mrgreen:
Discussions of US stuff always get sensitive, either 'political comments' or what the moderates deem to be. Discussing France is probably easier. France has a lot of things going for it economically by general world standards, in any informed view. However there's also plenty of reason to doubt the wisdom of relying on French debt now as a proxy for 'riskless'. Right now the spread between French and German 10 yr bonds is less than 0.30% but was over 1% during the 2011 iteration of the ongoing EUR crisis. France is a nation state with a lot more debt to GDP than CA, though conversely part of a less tight union than CA is, with much greater barriers for jobs and capital to move out of France to rest of EU than CA to rest of US if taxes are too high. But broadly speaking these are two entities with real challenges which issue in a currency they don't control. There's a tax upside to high income CA'ans to invest in CA muni's which doesn't exist for any US investor to concentrate debt investment in France. But just looking at risk, it's real in both cases, neither France nor CA debt is a close proxy for 'riskless' IMO.

I live in NJ and would not consider concentrating my 'low risk' assets in NJ muni's. I'm not saying NJ is about to collapse. It also has some impressive stats (GDP per person, education results, etc) but real challenges, and NJ issuers are generally lower rated than CA ones. But anyway real risk, not for my low risk allocation in a portfolio that has plenty of upside from higher risk (stocks and real estate) assets.
Seasonal
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Re: Munis vs. other "safe" investments?

Post by Seasonal »

France 10 year is at -0.194%. http://www.worldgovernmentbonds.com/country/franc

US 10 year is at 0.67%. https://www.bloomberg.com/markets/rates ... t-bonds/us

Which does the market regard as riskier?
typical.investor
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Re: Munis vs. other "safe" investments?

Post by typical.investor »

Seasonal wrote: Sun Sep 13, 2020 6:15 pm France 10 year is at -0.194%. http://www.worldgovernmentbonds.com/country/franc

US 10 year is at 0.67%. https://www.bloomberg.com/markets/rates ... t-bonds/us

Which does the market regard as riskier?
I am sorry. That's just looloo silly (whatever that is).

Um, yeah first, rates don't only indicate risk but include such yummies as inflation expectations
Second, there are some implicit expectations for currency movements based on the rates bakes in that pie
Third, a central bank controls one and lowers it to stimulate the economy and exports, while the is freer to reflect the market

I would draw no conclusions and personally don't evaluate my muni safety based on anything about France. It's just not applicable IMO.

Anyway, I thought it was a huge mistake in March when many attributed falling prices to a perception of increased risk. In fact, much of the movement was liquidity. Sure, some was reevaluation of risk, but munis are designed to withstand recessions. Anyway, I don't share the view that rates only reflect risk.
Seasonal
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Re: Munis vs. other "safe" investments?

Post by Seasonal »

typical.investor wrote: Sun Sep 13, 2020 6:25 pm
Seasonal wrote: Sun Sep 13, 2020 6:15 pm France 10 year is at -0.194%. http://www.worldgovernmentbonds.com/country/franc

US 10 year is at 0.67%. https://www.bloomberg.com/markets/rates ... t-bonds/us

Which does the market regard as riskier?
I am sorry. That's just looloo silly (whatever that is).

Um, yeah first, rates don't only indicate risk but include such yummies as inflation expectations
Second, there are some implicit expectations for currency movements based on the rates bakes in that pie
Third, a central bank controls one and lowers it to stimulate the economy and exports, while the is freer to reflect the market

I would draw no conclusions and personally don't evaluate my muni safety based on anything about France. It's just not applicable IMO.

Anyway, I thought it was a huge mistake in March when many attributed falling prices to a perception of increased risk. In fact, much of the movement was liquidity. Sure, some was reevaluation of risk, but munis are designed to withstand recessions. Anyway, I don't share the view that rates only reflect risk.
What difference in inflation expectations in the two countries are you seeing?

Government debt is largely held domestically, which should limit the effects of currency movement.

Which one has a central bank that controls it and is lowering rates to stimulate, etc.? There are a lot of posts here about the Fed artificially suppressing interest rates and the threat of zooming inflation.

Rates reflect more than risk, but it's a good proxy.

I mentioned France because of the post immediately above mine.
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txaggie
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Re: Munis vs. other "safe" investments?

Post by txaggie »

typical.investor wrote: Sat Sep 12, 2020 9:14 pm
palanzo wrote: Sat Sep 12, 2020 8:33 pm
ilan1h wrote: Sat Sep 12, 2020 1:08 pm Most of my bond holdings are in CA int munis and national interm munis due to high state and federal tax brackets. Overall, have been very happy with the peace of mind and relatively smooth ride that these give. Overall tax equivalent yield YTD of about 6%.
How did you achieve this? This does not seem possible in 2020.
Not sure how they did, but XMPT which follows an index of municipal bond CEF funds (some of which use leverage and some of which are high yield) has a 30 day Tax equivalent SEC yield of exactly 6.00% as of 09/11/2020 for the 32% bracket.

It’s a bit volatile though and given they way people here often bail on munis when the road gets bumpy, I am not recommending it.

https://www.vaneck.com/etf/income/xmpt/overview/
Wow, XMPT has a 2.02% ER. That is really expensive!
typical.investor
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Re: Munis vs. other "safe" investments?

Post by typical.investor »

Seasonal wrote: Sun Sep 13, 2020 6:57 pm
typical.investor wrote: Sun Sep 13, 2020 6:25 pm
Seasonal wrote: Sun Sep 13, 2020 6:15 pm France 10 year is at -0.194%. http://www.worldgovernmentbonds.com/country/franc

US 10 year is at 0.67%. https://www.bloomberg.com/markets/rates ... t-bonds/us

Which does the market regard as riskier?
I am sorry. That's just looloo silly (whatever that is).

Um, yeah first, rates don't only indicate risk but include such yummies as inflation expectations
Second, there are some implicit expectations for currency movements based on the rates bakes in that pie
Third, a central bank controls one and lowers it to stimulate the economy and exports, while the is freer to reflect the market

I would draw no conclusions and personally don't evaluate my muni safety based on anything about France. It's just not applicable IMO.

Anyway, I thought it was a huge mistake in March when many attributed falling prices to a perception of increased risk. In fact, much of the movement was liquidity. Sure, some was reevaluation of risk, but munis are designed to withstand recessions. Anyway, I don't share the view that rates only reflect risk.
What difference in inflation expectations in the two countries are you seeing?
The -0.194% yield offered by France is expected to return 0.67% in USD when hedge yield which reflects currency expectations is factored in. In fact, it returns about that when held in BNDX.
Seasonal wrote: Sun Sep 13, 2020 6:57 pm
Which one has a central bank that controls it and is lowering rates to stimulate, etc.? There are a lot of posts here about the Fed artificially suppressing interest rates and the threat of zooming inflation.
Not California for sure. I don't believe we can compare yields on government bonds to munis and get a meaningful proxy for risk. Especially as France has Germany to contend with and CA has Washington. While these things are un-discussable, it does not mean they are irrelevant.

Anyway, I think it's more accurate to compare munis to treasuries, but even there ... short term muni rates may or may not reflect muni risk. When the Fed pushes treasuries down in a recession, I don't believe that makes munis less risky. But their yield would say they are. I mean does fixed income really get less risky in a recession? From an inflation perspective, yes perhaps but not in terms of credit risk.
JackoC
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Re: Munis vs. other "safe" investments?

Post by JackoC »

Seasonal wrote: Sun Sep 13, 2020 6:15 pm France 10 year is at -0.194%. http://www.worldgovernmentbonds.com/country/franc

US 10 year is at 0.67%. https://www.bloomberg.com/markets/rates ... t-bonds/us

Which does the market regard as riskier?
As mentioned, elementary mistake. Those are two different currencies with different central banks' monetary policy and inflation expectations: the difference in yield between govt bonds in different currencies can't be read as the difference in perceived credit risk. Look instead to the history of French yields v German EUR issues, same currency controlled by the same entity the ECB. As I mentioned, now there's only around 0.30% higher yield on French 10yr but it was well over 1% in the 2011 stage of the EUR crisis. You can't compare any particular country and any particular group of muni issuers within a single state, *too* closely, obviously. They have one big thing in common (they issue debt in a currency they much less control over than a single national issuer with a single central bank, say UK or Canada, not only the US), but a lot of other things not in common. Anyway the general point is that France is noticeably different than 'riskless, noticeably even than some other EUR issuers none of whom solely control EUR monetary policy. Just making some positive comments about France's economy, potential, etc, even if reasonable, doesn't make that go away.

It's one thing for a credit to be decent, it's a whole different level to drop any consideration of diversification. We do this with US federal credit but that's a very special standard. No state or group of issuers within it is really close to the same thing. The state specific muni funds exist for a reason we all understand, a tax advantage. But I wouldn't put a significant % of safe money in one.
Last edited by JackoC on Sun Sep 13, 2020 7:47 pm, edited 1 time in total.
typical.investor
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Re: Munis vs. other "safe" investments?

Post by typical.investor »

txaggie wrote: Sun Sep 13, 2020 7:13 pm
typical.investor wrote: Sat Sep 12, 2020 9:14 pm
palanzo wrote: Sat Sep 12, 2020 8:33 pm
ilan1h wrote: Sat Sep 12, 2020 1:08 pm Most of my bond holdings are in CA int munis and national interm munis due to high state and federal tax brackets. Overall, have been very happy with the peace of mind and relatively smooth ride that these give. Overall tax equivalent yield YTD of about 6%.
How did you achieve this? This does not seem possible in 2020.
Not sure how they did, but XMPT which follows an index of municipal bond CEF funds (some of which use leverage and some of which are high yield) has a 30 day Tax equivalent SEC yield of exactly 6.00% as of 09/11/2020 for the 32% bracket.

It’s a bit volatile though and given they way people here often bail on munis when the road gets bumpy, I am not recommending it.

https://www.vaneck.com/etf/income/xmpt/overview/
Wow, XMPT has a 2.02% ER. That is really expensive!
Yeah it is. That includes cost of leverage.

Aug 2011 - Aug 2020 CAGR (life of XMPT)

XMPT 6.39%
VCAIX 4.06% (Vanguard CA Interm-Term)
VWITX 3.79% (Vanguard Interm-Term)

Those returns include costs. Again though, the volatility is too high for most.

https://www.portfoliovisualizer.com/bac ... sisResults
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