Is the potential upside in munis worth the downside?

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ilan1h
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Is the potential upside in munis worth the downside?

Post by ilan1h »

Many of us, especially in high tax brackets and high tax states, use munis in our taxable accounts as a relatively safe and stable investment option. The downsides of munis have been discussed in great detail and most would agree that munis (specifically national muni bond funds) are generally very conservative investments but not immune from sudden downturns. During the last financial meltdown the national muni funds lost over 10% of their value rather rapidly (compared to 50% stock market losses). Munis also dipped sharply at the beginning of the pandemic. So, in my own mind I am reconciled to potential losses of 10-20% in muni funds in the event of a serious downturn. In the last few downturns the stress seemed more related to liquidity crunches or mechanical market factors than to deep underlying issues and they recovered quickly. However, the upside is more difficult to predict. Right now the yields on these funds are very low and deflation is almost an impossibility with all the spending that we're doing ie: rates will either remain stable or rise. Given all of this, what is the potential upside of munis and is it worth the downsides?
Last edited by ilan1h on Sat Apr 17, 2021 7:49 pm, edited 1 time in total.
bck63
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Re: Is the potential upside in munis worth the downside?

Post by bck63 »

ilan1h wrote: Sat Apr 17, 2021 5:56 pm Many of us, especially in high tax brackets and high tax states, use munis in our taxable accounts as a relatively safe and stable investment option. The downsides of munis have been discussed in great detail and most would agree that munis (specifically national muni bond funds) are generally very conservative investments but not immune from sudden downturns. During the last financial meltdown the national muni funds lost over 20% of their value rather rapidly (compared to 50% stock market losses). Munis also dipped sharply at the beginning of the pandemic. So, in my own mind I am reconciled to potential losses of 20-30% in muni funds in the event of a serious downturn. In the last few downturns the stress seemed more related to liquidity crunches or mechanical market factors than to deep underlying issues and they recovered quickly. However, the upside is more difficult to predict. Right now the yields on these funds are very low and deflation is almost an impossibility with all the spending that we're doing ie: rates will either remain stable or rise. Given all of this, what is the potential upside of munis and is it worth the downsides?
Which national muni mutual funds lost 20% in the most recent downturn? VWITX, which I hold, lost nothing even close to that. I think it was down about 4% at the worst of it. I know ETFs like VTEB had a tougher time of it in terms of bid ask spreads.
RAchip
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Re: Is the potential upside in munis worth the downside?

Post by RAchip »

I hold individual muni’s (from my state since my state has income tax) and can hold to maturity if I want so that fluctuations in market price are irrelevant if I want them to be. I bought my bonds years ago, however, so I could sell some or all for a gain now. Buying bonds now makes no sense to me since the interest return is so low. Just hold cash if you dont want to be 100% stock.
WapelloHawk
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Re: Is the potential upside in munis worth the downside?

Post by WapelloHawk »

I hold Vanguard’s HY muni fund for the tax free yield. To me, the fund share price is mainly irrelevant as I doubt I will ever sell it.
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Cyclesafe
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Re: Is the potential upside in munis worth the downside?

Post by Cyclesafe »

Bonds funds are generally not held for appreciation, they are held for ballast and interest income. If they go up, great. If they go down, they are TLH'ed. Muni's are held when marginal tax rates make their tax equivalent yield better than non-muni's. Not safer than treasuries, but much better than corporates.
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ilan1h
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Re: Is the potential upside in munis worth the downside?

Post by ilan1h »

bck63 wrote: Sat Apr 17, 2021 7:03 pm
ilan1h wrote: Sat Apr 17, 2021 5:56 pm Many of us, especially in high tax brackets and high tax states, use munis in our taxable accounts as a relatively safe and stable investment option. The downsides of munis have been discussed in great detail and most would agree that munis (specifically national muni bond funds) are generally very conservative investments but not immune from sudden downturns. During the last financial meltdown the national muni funds lost over 20% of their value rather rapidly (compared to 50% stock market losses). Munis also dipped sharply at the beginning of the pandemic. So, in my own mind I am reconciled to potential losses of 20-30% in muni funds in the event of a serious downturn. In the last few downturns the stress seemed more related to liquidity crunches or mechanical market factors than to deep underlying issues and they recovered quickly. However, the upside is more difficult to predict. Right now the yields on these funds are very low and deflation is almost an impossibility with all the spending that we're doing ie: rates will either remain stable or rise. Given all of this, what is the potential upside of munis and is it worth the downsides?
Which national muni mutual funds lost 20% in the most recent downturn? VWITX, which I hold, lost nothing even close to that. I think it was down about 4% at the worst of it. I know ETFs like VTEB had a tougher time of it in terms of bid ask spreads.
Sorry, my bad. The max drawdown for the Long term muni was about 10% from inception. I think that a max drawdown of 10-20% is how I would view it (compared to stock market 50-80%)
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ilan1h
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Re: Is the potential upside in munis worth the downside?

Post by ilan1h »

WapelloHawk wrote: Sat Apr 17, 2021 7:20 pm I hold Vanguard’s HY muni fund for the tax free yield. To me, the fund share price is mainly irrelevant as I doubt I will ever sell it.
I noticed that the HY muni fund had a CAGR 1% higher than VWITX (intermed muni fund) since 1986. But this came at the expense of a bumpier ride. During the big dips it has fallen as much as 14% (fairly terrifying for a muni) but recovered pretty quickly. It saw a decline of 10% in 2008 compared to O% for VWITX but overall outperformed VWITX in almost every year since 2000. Looks like a worthwhile way to juice returns on munis a little bit more.
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Re: Is the potential upside in munis worth the downside?

Post by hudson »

ilan1h wrote: Sat Apr 17, 2021 5:56 pm Many of us, especially in high tax brackets and high tax states, use munis in our taxable accounts as a relatively safe and stable investment option. The downsides of munis have been discussed in great detail and most would agree that munis (specifically national muni bond funds) are generally very conservative investments but not immune from sudden downturns. During the last financial meltdown the national muni funds lost over 10% of their value rather rapidly (compared to 50% stock market losses). Munis also dipped sharply at the beginning of the pandemic. So, in my own mind I am reconciled to potential losses of 10-20% in muni funds in the event of a serious downturn. In the last few downturns the stress seemed more related to liquidity crunches or mechanical market factors than to deep underlying issues and they recovered quickly. However, the upside is more difficult to predict. Right now the yields on these funds are very low and deflation is almost an impossibility with all the spending that we're doing ie: rates will either remain stable or rise. Given all of this, what is the potential upside of munis and is it worth the downsides?
ilan1h,

I agree that muni losses were due to liquidity...also many holders panicked.
I think that high quality munis and funds are excellent holdings.
It's all about the holdings. AAA/AA is king.
W. Bernstein said that holding munis is fine as long as you have plenty of treasuries and CDs to back them up.
Bottom Line: High quality munis and funds are good investments.

If my muni holding VWIUX drops below my purchase price, I'm going to tax loss harvest into a fund with even safer holdings.
Last edited by hudson on Sun Apr 18, 2021 5:58 am, edited 1 time in total.
GaryA505
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Re: Is the potential upside in munis worth the downside?

Post by GaryA505 »

WapelloHawk wrote: Sat Apr 17, 2021 7:20 pm I hold Vanguard’s HY muni fund for the tax free yield. To me, the fund share price is mainly irrelevant as I doubt I will ever sell it.
Same here. Vanguard’s HY muni fund (VWALX/VWAHX) is distributing about 3% this year, US tax-free.
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bck63
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Re: Is the potential upside in munis worth the downside?

Post by bck63 »

ilan1h wrote: Sat Apr 17, 2021 7:54 pm
bck63 wrote: Sat Apr 17, 2021 7:03 pm
ilan1h wrote: Sat Apr 17, 2021 5:56 pm Many of us, especially in high tax brackets and high tax states, use munis in our taxable accounts as a relatively safe and stable investment option. The downsides of munis have been discussed in great detail and most would agree that munis (specifically national muni bond funds) are generally very conservative investments but not immune from sudden downturns. During the last financial meltdown the national muni funds lost over 20% of their value rather rapidly (compared to 50% stock market losses). Munis also dipped sharply at the beginning of the pandemic. So, in my own mind I am reconciled to potential losses of 20-30% in muni funds in the event of a serious downturn. In the last few downturns the stress seemed more related to liquidity crunches or mechanical market factors than to deep underlying issues and they recovered quickly. However, the upside is more difficult to predict. Right now the yields on these funds are very low and deflation is almost an impossibility with all the spending that we're doing ie: rates will either remain stable or rise. Given all of this, what is the potential upside of munis and is it worth the downsides?
Which national muni mutual funds lost 20% in the most recent downturn? VWITX, which I hold, lost nothing even close to that. I think it was down about 4% at the worst of it. I know ETFs like VTEB had a tougher time of it in terms of bid ask spreads.
Sorry, my bad. The max drawdown for the Long term muni was about 10% from inception. I think that a max drawdown of 10-20% is how I would view it (compared to stock market 50-80%)
I owned some VTEB during the March '20 downturn and it was scary seeing a portion of my intermediate bonds drop so steeply. I waited till it came back up and put it all in a mutual fund, which fared much better.
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Re: Is the potential upside in munis worth the downside?

Post by Call_Me_Op »

Given that I follow a risk barbell approach - investments split between very safe and very volatile, I have opted not to use muni's in the safe portion. If I want more risk, I will dial-up equities. Structuring the portfolio this way allows me to control how much of my money is at risk and how much is safe.
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Re: Is the potential upside in munis worth the downside?

Post by Cyclesafe »

Call_Me_Op wrote: Sun Apr 18, 2021 8:01 am Given that I follow a risk barbell approach - investments split between very safe and very volatile, I have opted not to use muni's in the safe portion. If I want more risk, I will dial-up equities. Structuring the portfolio this way allows me to control how much of my money is at risk and how much is safe.
But are the respective risks correlated? Volatility for each have different causes.
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burritoLover
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Re: Is the potential upside in munis worth the downside?

Post by burritoLover »

bck63 wrote: Sat Apr 17, 2021 7:03 pm
ilan1h wrote: Sat Apr 17, 2021 5:56 pm Many of us, especially in high tax brackets and high tax states, use munis in our taxable accounts as a relatively safe and stable investment option. The downsides of munis have been discussed in great detail and most would agree that munis (specifically national muni bond funds) are generally very conservative investments but not immune from sudden downturns. During the last financial meltdown the national muni funds lost over 20% of their value rather rapidly (compared to 50% stock market losses). Munis also dipped sharply at the beginning of the pandemic. So, in my own mind I am reconciled to potential losses of 20-30% in muni funds in the event of a serious downturn. In the last few downturns the stress seemed more related to liquidity crunches or mechanical market factors than to deep underlying issues and they recovered quickly. However, the upside is more difficult to predict. Right now the yields on these funds are very low and deflation is almost an impossibility with all the spending that we're doing ie: rates will either remain stable or rise. Given all of this, what is the potential upside of munis and is it worth the downsides?
Which national muni mutual funds lost 20% in the most recent downturn? VWITX, which I hold, lost nothing even close to that. I think it was down about 4% at the worst of it. I know ETFs like VTEB had a tougher time of it in terms of bid ask spreads.
More like 11% down from the peak on 3/9/20 to the bottom on 4/2/20
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bck63
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Re: Is the potential upside in munis worth the downside?

Post by bck63 »

burritoLover wrote: Sun Apr 18, 2021 8:39 am
bck63 wrote: Sat Apr 17, 2021 7:03 pm
ilan1h wrote: Sat Apr 17, 2021 5:56 pm Many of us, especially in high tax brackets and high tax states, use munis in our taxable accounts as a relatively safe and stable investment option. The downsides of munis have been discussed in great detail and most would agree that munis (specifically national muni bond funds) are generally very conservative investments but not immune from sudden downturns. During the last financial meltdown the national muni funds lost over 20% of their value rather rapidly (compared to 50% stock market losses). Munis also dipped sharply at the beginning of the pandemic. So, in my own mind I am reconciled to potential losses of 20-30% in muni funds in the event of a serious downturn. In the last few downturns the stress seemed more related to liquidity crunches or mechanical market factors than to deep underlying issues and they recovered quickly. However, the upside is more difficult to predict. Right now the yields on these funds are very low and deflation is almost an impossibility with all the spending that we're doing ie: rates will either remain stable or rise. Given all of this, what is the potential upside of munis and is it worth the downsides?
Which national muni mutual funds lost 20% in the most recent downturn? VWITX, which I hold, lost nothing even close to that. I think it was down about 4% at the worst of it. I know ETFs like VTEB had a tougher time of it in terms of bid ask spreads.
More like 11% down from the peak on 3/9/20 to the bottom on 4/2/20
Yes, now I see. Thanks.
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Re: Is the potential upside in munis worth the downside?

Post by secondopinion »

hudson wrote: Sat Apr 17, 2021 8:32 pm I agree that muni losses were due to liquidity...also many holders panicked.
I think that high quality munis and funds are excellent holdings.
It's all about the holdings. AAA/AA is king.
W. Bernstein said that holding munis is fine as long as you have plenty of treasuries and CDs to back them up.
Bottom Line: High quality munis and funds are good investments.
All bond ETFs with any credit risk dropped considerably (discounts all over and that got me to buy a lot of them), and municipal bonds were the least of my concerns. And Bernstein must be highly conservative with bonds if he feels like "plenty of treasuries and CDs" has to hedge them. Municipals are part of my "mostly safe" assets; they hedge stocks since they fall little when they stocks fall. They are not scary; who needs "plenty of treasuries and CDs" to back them? Just some is sufficient.
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
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Re: Is the potential upside in munis worth the downside?

Post by Call_Me_Op »

Cyclesafe wrote: Sun Apr 18, 2021 8:04 am
Call_Me_Op wrote: Sun Apr 18, 2021 8:01 am Given that I follow a risk barbell approach - investments split between very safe and very volatile, I have opted not to use muni's in the safe portion. If I want more risk, I will dial-up equities. Structuring the portfolio this way allows me to control how much of my money is at risk and how much is safe.
But are the respective risks correlated? Volatility for each have different causes.
Not sure what you are asking. Equities and very safe bonds are largely uncorrelated - and can be negatively correlated just when you need it.

If you are asking about using muni's (which I do not hold), they can become correlated to equities at the worst possible time.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
secondopinion
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Re: Is the potential upside in munis worth the downside?

Post by secondopinion »

Call_Me_Op wrote: Tue Apr 20, 2021 7:16 am
Cyclesafe wrote: Sun Apr 18, 2021 8:04 am
Call_Me_Op wrote: Sun Apr 18, 2021 8:01 am Given that I follow a risk barbell approach - investments split between very safe and very volatile, I have opted not to use muni's in the safe portion. If I want more risk, I will dial-up equities. Structuring the portfolio this way allows me to control how much of my money is at risk and how much is safe.
But are the respective risks correlated? Volatility for each have different causes.
Not sure what you are asking. Equities and very safe bonds are largely uncorrelated - and can be negatively correlated just when you need it.

If you are asking about using muni's (which I do not hold), they can become correlated to equities at the worst possible time.
Anything with risk is highly correlated when no one wants risk in the market; however, it is how far it will drop that matters when it does correlate short-term. If one is long-term invested, then only prolonged timeframes matter for correlation; I doubt correlation will be much of anything over longer periods for municipals versus stocks.
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
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Re: Is the potential upside in munis worth the downside?

Post by Chris K Jones »

I was surprised by the temporary drop in VTEB last year so I changed my investment policy statement and now I limit my muni bonds to no more than 25% of my fixed income holdings. It doesn't amount to too much of a difference right now because most of my fixed income allocation is in tax deferred (403b, IRAs, etc). But for me, it was a lesson learned.
secondopinion
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Re: Is the potential upside in munis worth the downside?

Post by secondopinion »

Chris K Jones wrote: Tue Apr 20, 2021 12:59 pm I was surprised by the temporary drop in VTEB last year so I changed my investment policy statement and now I limit my muni bonds to no more than 25% of my fixed income holdings. It doesn't amount to too much of a difference right now because most of my fixed income allocation is in tax deferred (403b, IRAs, etc). But for me, it was a lesson learned.
I have VTEB, and I knew exactly why it dropped in March. The wrong lesson was learned: VTEB was on steep discount during March 2020. Look at the NAV premium/discount charts; it had very little to do with the municipals themselves but more on how the market handled an ETF. https://ycharts.com/companies/VTEB/disc ... ium_to_nav
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
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ram
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Re: Is the potential upside in munis worth the downside?

Post by ram »

hudson wrote: Sat Apr 17, 2021 8:32 pm
ilan1h wrote: Sat Apr 17, 2021 5:56 pm Many of us, especially in high tax brackets and high tax states, use munis in our taxable accounts as a relatively safe and stable investment option. The downsides of munis have been discussed in great detail and most would agree that munis (specifically national muni bond funds) are generally very conservative investments but not immune from sudden downturns. During the last financial meltdown the national muni funds lost over 10% of their value rather rapidly (compared to 50% stock market losses). Munis also dipped sharply at the beginning of the pandemic. So, in my own mind I am reconciled to potential losses of 10-20% in muni funds in the event of a serious downturn. In the last few downturns the stress seemed more related to liquidity crunches or mechanical market factors than to deep underlying issues and they recovered quickly. However, the upside is more difficult to predict. Right now the yields on these funds are very low and deflation is almost an impossibility with all the spending that we're doing ie: rates will either remain stable or rise. Given all of this, what is the potential upside of munis and is it worth the downsides?
ilan1h,

I agree that muni losses were due to liquidity...also many holders panicked.
I think that high quality munis and funds are excellent holdings.
It's all about the holdings. AAA/AA is king.
W. Bernstein said that holding munis is fine as long as you have plenty of treasuries and CDs to back them up.
Bottom Line: High quality munis and funds are good investments.

If my muni holding VWIUX drops below my purchase price, I'm going to tax loss harvest into a fund with even safer holdings.
I started buying munis a few months ago and I have VWIUX. I have not yet identified a tax loss harvesting partner.
What do you use? What would you suggest? Thanks.
Ram
Chris K Jones
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Re: Is the potential upside in munis worth the downside?

Post by Chris K Jones »

secondopinion wrote: Tue Apr 20, 2021 5:30 pm
Chris K Jones wrote: Tue Apr 20, 2021 12:59 pm I was surprised by the temporary drop in VTEB last year so I changed my investment policy statement and now I limit my muni bonds to no more than 25% of my fixed income holdings. It doesn't amount to too much of a difference right now because most of my fixed income allocation is in tax deferred (403b, IRAs, etc). But for me, it was a lesson learned.
I have VTEB, and I knew exactly why it dropped in March. The wrong lesson was learned: VTEB was on steep discount during March 2020. Look at the NAV premium/discount charts; it had very little to do with the municipals themselves but more on how the market handled an ETF. https://ycharts.com/companies/VTEB/disc ... ium_to_nav
Thanks for the comment. Best wishes.
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Re: Is the potential upside in munis worth the downside?

Post by Cyclesafe »

ram wrote: Tue Apr 20, 2021 7:25 pm I started buying munis a few months ago and I have VWIUX. I have not yet identified a tax loss harvesting partner.
What do you use? What would you suggest? Thanks.
I have used my state specific intermediate duration muni (VCADX), but I wouldn't hesitate to use a short duration national either.
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secondopinion
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Re: Is the potential upside in munis worth the downside?

Post by secondopinion »

ilan1h wrote: Sat Apr 17, 2021 5:56 pm Many of us, especially in high tax brackets and high tax states, use munis in our taxable accounts as a relatively safe and stable investment option. The downsides of munis have been discussed in great detail and most would agree that munis (specifically national muni bond funds) are generally very conservative investments but not immune from sudden downturns. During the last financial meltdown the national muni funds lost over 10% of their value rather rapidly (compared to 50% stock market losses). Munis also dipped sharply at the beginning of the pandemic. So, in my own mind I am reconciled to potential losses of 10-20% in muni funds in the event of a serious downturn. In the last few downturns the stress seemed more related to liquidity crunches or mechanical market factors than to deep underlying issues and they recovered quickly. However, the upside is more difficult to predict. Right now the yields on these funds are very low and deflation is almost an impossibility with all the spending that we're doing ie: rates will either remain stable or rise. Given all of this, what is the potential upside of munis and is it worth the downsides?
Municipal bonds are sometimes callable, so they often have a limited upside no matter what the interest rates are. Stress in the markets should not be a reason to avoid them as it is only a short-term concern; most holders buy tax-free municipal bonds as long-term holdings since their main appeal is their tax-free yield and very low credit risk. Because they are tax-free, they are also somewhat cushioned against interest rate changes since they adjust on an after-tax basis.

Trading municipal bonds is not tax-free, and there are much better bonds to trade than them (not that I encourage trading).
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
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Electron
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Re: Is the potential upside in munis worth the downside?

Post by Electron »

I've also been concerned about buying municipal bond funds with NAVs generally quite high and yields relatively low. I went ahead anyway and added to my holdings several times in the last year. I am a long term investor and income is the primary component in bond fund total return over time.

I think it is likely that the NAV in these funds will be lower in the years ahead. Tax loss harvesting can be used to get additional tax benefit. My holdings include two state specific funds and two national funds so I will have some flexibility.

You might also keep an eye on distribution yield which may be quite a bit higher than SEC yield.
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ilan1h
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Re: Is the potential upside in munis worth the downside?

Post by ilan1h »

It seems like there is more and more certainty that inflation is going to rise, perhaps sooner than expected. Many articles appearing from reliable sources that are predicting that the fed will probably raise rates sooner than was previously anticipated. With the astronomical government spending going on it seems almost impossible that rates will stay the same or that they would decline. So if we have close to 100% certainty that rates are going up, are munis still a good investment? I almost feel trapped into munis because I want to avoid stocks, do not have any tax deferred space left, and everything else is yielding nothing.
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Re: Is the potential upside in munis worth the downside?

Post by CuriousTacos »

secondopinion wrote: Tue Apr 20, 2021 12:28 pm
Call_Me_Op wrote: Tue Apr 20, 2021 7:16 am Not sure what you are asking. Equities and very safe bonds are largely uncorrelated - and can be negatively correlated just when you need it.

If you are asking about using muni's (which I do not hold), they can become correlated to equities at the worst possible time.
Anything with risk is highly correlated when no one wants risk in the market; however, it is how far it will drop that matters when it does correlate short-term. If one is long-term invested, then only prolonged timeframes matter for correlation; I doubt correlation will be much of anything over longer periods for municipals versus stocks.
I agree that anything can become highly correlated when you least want it to be, but there are differences in likelihood based on the past. Intermediate to long-term treasuries performed appreciably better than tax-exempt bonds in the '08 and '20 downturns. The main difference in risk between munis and treasuries is credit and liquidity risk, which are very likely correlated with the stock market, and my analysis suggests it's better to have this risk on the equities side.
Last edited by CuriousTacos on Thu Apr 29, 2021 11:19 am, edited 1 time in total.
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Re: Is the potential upside in munis worth the downside?

Post by Call_Me_Op »

secondopinion wrote: Tue Apr 20, 2021 12:28 pm
Call_Me_Op wrote: Tue Apr 20, 2021 7:16 am
Cyclesafe wrote: Sun Apr 18, 2021 8:04 am
Call_Me_Op wrote: Sun Apr 18, 2021 8:01 am Given that I follow a risk barbell approach - investments split between very safe and very volatile, I have opted not to use muni's in the safe portion. If I want more risk, I will dial-up equities. Structuring the portfolio this way allows me to control how much of my money is at risk and how much is safe.
But are the respective risks correlated? Volatility for each have different causes.
Not sure what you are asking. Equities and very safe bonds are largely uncorrelated - and can be negatively correlated just when you need it.

If you are asking about using muni's (which I do not hold), they can become correlated to equities at the worst possible time.
Anything with risk is highly correlated when no one wants risk in the market; however, it is how far it will drop that matters when it does correlate short-term. If one is long-term invested, then only prolonged timeframes matter for correlation; I doubt correlation will be much of anything over longer periods for municipals versus stocks.
What you say holds looking in the rear-view mirror. There is a stark difference (in my mind) between treasuries and all other bonds. With treasuries, I know I will get my money back. That cannot be said with any other bonds. That makes a big difference psychologically.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Is the potential upside in munis worth the downside?

Post by midareff »

ilan1h wrote: Sat Apr 17, 2021 5:56 pm Many of us, especially in high tax brackets and high tax states, use munis in our taxable accounts as a relatively safe and stable investment option. The downsides of munis have been discussed in great detail and most would agree that munis (specifically national muni bond funds) are generally very conservative investments but not immune from sudden downturns. During the last financial meltdown the national muni funds lost over 10% of their value rather rapidly (compared to 50% stock market losses). Munis also dipped sharply at the beginning of the pandemic. So, in my own mind I am reconciled to potential losses of 10-20% in muni funds in the event of a serious downturn. In the last few downturns the stress seemed more related to liquidity crunches or mechanical market factors than to deep underlying issues and they recovered quickly. However, the upside is more difficult to predict. Right now the yields on these funds are very low and deflation is almost an impossibility with all the spending that we're doing ie: rates will either remain stable or rise. Given all of this, what is the potential upside of munis and is it worth the downsides?
Downside risk is immaterial unless you sell.
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Re: Is the potential upside in munis worth the downside?

Post by secondopinion »

Call_Me_Op wrote: Thu Apr 29, 2021 8:37 am
secondopinion wrote: Tue Apr 20, 2021 12:28 pm
Call_Me_Op wrote: Tue Apr 20, 2021 7:16 am
Cyclesafe wrote: Sun Apr 18, 2021 8:04 am
Call_Me_Op wrote: Sun Apr 18, 2021 8:01 am Given that I follow a risk barbell approach - investments split between very safe and very volatile, I have opted not to use muni's in the safe portion. If I want more risk, I will dial-up equities. Structuring the portfolio this way allows me to control how much of my money is at risk and how much is safe.
But are the respective risks correlated? Volatility for each have different causes.
Not sure what you are asking. Equities and very safe bonds are largely uncorrelated - and can be negatively correlated just when you need it.

If you are asking about using muni's (which I do not hold), they can become correlated to equities at the worst possible time.
Anything with risk is highly correlated when no one wants risk in the market; however, it is how far it will drop that matters when it does correlate short-term. If one is long-term invested, then only prolonged timeframes matter for correlation; I doubt correlation will be much of anything over longer periods for municipals versus stocks.
What you say holds looking in the rear-view mirror. There is a stark difference (in my mind) between treasuries and all other bonds. With treasuries, I know I will get my money back. That cannot be said with any other bonds. That makes a big difference psychologically.
I am not sure you are understanding my comment. I did not say municipals were risk-less; I just said that they are not, over long periods, correlated to stocks very much.

Every investment has risk (even bonds that will not default). Having managed my own "risk-less" investments for over a decade, the entire notion of them being risk-less is false; there is always something that can go wrong. Any duration, and interest increases will cause you to lose principal temporarily (hence risk to the current principal, but not to the future principal); no duration, and there is absolutely no guarantees as to what it is worth in the future (risk to future principal, but not to the current principal).

So pick which risks you want to take.
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Re: Is the potential upside in munis worth the downside?

Post by RAchip »

“what is the potential upside of munis“

There is normally only “upside” in bonds if interest rates fall. Do you think interest rates are going to go down? If you do, I own a very nice bridge in Brooklyn you will definitely be interested in.

However there is a supply and demand issue. If tax laws change, munis could be in high demand and there may be a limited amount of new issuances which could keep muni prices from falling as much as they otherwise would as interest rates rise.

Remember, when you buy a share of a bond fund you are buying a security with unlimited duration.
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Re: Is the potential upside in munis worth the downside?

Post by namajones »

ilan1h wrote: Sat Apr 17, 2021 5:56 pm Given all of this, what is the potential upside of munis and is it worth the downsides?
So my sense is that the 10-year Treasury yield is the dog that wags the tail that contains munis and all lesser forms of debt for sale.

That's on the large arc. On smaller arcs are state-related budgets and issues that affect munis.

So with munis you take more risk. Whether the extra yield you get is worthwile is a question only each individual investor can answer.
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Re: Is the potential upside in munis worth the downside?

Post by secondopinion »

CuriousTacos wrote: Thu Apr 29, 2021 2:51 am
secondopinion wrote: Tue Apr 20, 2021 12:28 pm
Call_Me_Op wrote: Tue Apr 20, 2021 7:16 am Not sure what you are asking. Equities and very safe bonds are largely uncorrelated - and can be negatively correlated just when you need it.

If you are asking about using muni's (which I do not hold), they can become correlated to equities at the worst possible time.
Anything with risk is highly correlated when no one wants risk in the market; however, it is how far it will drop that matters when it does correlate short-term. If one is long-term invested, then only prolonged timeframes matter for correlation; I doubt correlation will be much of anything over longer periods for municipals versus stocks.
I agree that anything can become highly correlated when you least want it to be, but there are differences in likelihood based on the past. Intermediate to long-term treasuries performed appreciably better than tax-exempt bonds in the '08 and '20 downturns. The main difference in risk between munis and treasuries is credit and liquidity risk, which are very likely correlated with the stock market, and my analysis suggests it's better to have this risk on the equities side.
Is there a reason for treasuries to be safe havens for guaranteeing principal (current or future depending on the bond duration)? Yes. But their negative correlation has not always been the case (and history states it does alternate). Long-term, it means nothing to treasuries. You receive possibly poor returns for principal protection.

I did acknowledge the short-term correlation problems with municipals. However, if I was holding municipals for 10+ years, I doubt I would be caring about a sudden price drop along with stocks or a liquidity crisis; these are short-term problems, not long-term ones. Same can be said about many investments.

The difference of risk between equites and municipal bonds is massive, even if they carry similar risk types. Municipals have a very low default rate (and do not forgot that recovery of some principal happens as well); stocks definitely do not.

In the long-term comparison, municipals do get paid (after-tax, that is) for the risk taken above treasuries. I am not part of the group of requiring 100% certainty with principal.
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Re: Is the potential upside in munis worth the downside?

Post by secondopinion »

RAchip wrote: Thu Apr 29, 2021 12:57 pm “what is the potential upside of munis“

There is normally only “upside” in bonds if interest rates fall. Do you think interest rates are going to go down? If you do, I own a very nice bridge in Brooklyn you will definitely be interested in.

However there is a supply and demand issue. If tax laws change, munis could be in high demand and there may be a limited amount of new issuances which could keep muni prices from falling as much as they otherwise would as interest rates rise.

Remember, when you buy a share of a bond fund you are buying a security with unlimited duration.
The upside is the yield you buy; period. Interest rate drops are only a short-term rise in price, and you get lesser yields along with it (what a great bargin?); long-term, you would want interest rates to go up, not down. Why? Because yields for future reinvestment of coupons and recently returned principal have improved. Speculators hope for rates to lower, not long-term investors.

Yes, bond funds never mature but the duration of the bond fund is not unlimited; it is perpetually limited but never 0. The difference? As long as the bond fund's duration is less than the investment timeframe, the vast majority of interest rate risk due to interest rates has be removed; if one has a shorter timeframe than the fund, then they have to acknowledge some risk to their principal. If it were truly unlimited, then all of their principal would be at risk regardless of the timeframe.
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Re: Is the potential upside in munis worth the downside?

Post by Electron »

ilan1h wrote: Wed Apr 28, 2021 10:23 pm It seems like there is more and more certainty that inflation is going to rise, perhaps sooner than expected. Many articles appearing from reliable sources that are predicting that the fed will probably raise rates sooner than was previously anticipated. With the astronomical government spending going on it seems almost impossible that rates will stay the same or that they would decline. So if we have close to 100% certainty that rates are going up, are munis still a good investment? I almost feel trapped into munis because I want to avoid stocks, do not have any tax deferred space left, and everything else is yielding nothing.
Those are all good points. One option is to buy individual municipal bonds and hold to maturity. A similar option is to buy Municipal Bond Unit Investment Trusts (UITs) which typically do hold bonds in their portfolios to maturity.

I'd also look at Invesco Municipal BulletShares. There is a choice of different maturity dates.

https://www.invesco.com/us/en/solutions ... -bond.html

Another argument is to buy the Municipal Bond fund if you think it will outperform a Money Market fund. The odds are quite good if you hold and reinvest for a period of time equal to the duration of the fund.

Lastly, it is helpful to look at Morningstar Total Return Charts that include difficult years in the bond market such as 1994. Bond funds seem to come through those periods better than one might expect. Once again, the longer term investor is usually rewarded with a reasonable return.
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Re: Is the potential upside in munis worth the downside?

Post by CuriousTacos »

secondopinion wrote: Thu Apr 29, 2021 1:22 pm Is there a reason for treasuries to be safe havens for guaranteeing principal (current or future depending on the bond duration)? Yes. But their negative correlation has not always been the case (and history states it does alternate).
I did acknowledge that. The 70s/80s is a well-known example, but it was significantly worse for munis (check the box for inflation adjustment to see just how bad, and this doesn't even start at the beginning of the decline). What I'm saying is that since muni's share essentially all the risks of treasuries plus (primarily) additional credit risk, pretty much any scenario where treasuries and stocks go down will cause munis to go down even more than treasuries of similar duration. Perhaps we agree on this, since you seem to focus more on your argument that long-term investors can ignore short-term fluctuations.
secondopinion wrote: Thu Apr 29, 2021 1:22 pm Long-term, it means nothing to treasuries. You receive possibly poor returns for principal protection.
If you're very heavily invested in fixed income, perhaps that's the scope of the comparison. But in the context of a portfolio with stocks, the fact that munis' credit risk is very likely correlated with stocks means you have to hold more munis to provide the same diversification (in terms of portfolio volatility or drawdown). So while munis may have a higher expected after-tax return than treasuries, a 70/30 stocks/munis portfolio probably does not have a higher expected return than a 75/25 stocks/treasuries portfolio (which has historically had similar risk). Comparison here
secondopinion wrote: Thu Apr 29, 2021 1:22 pm However, if I was holding municipals for 10+ years, I doubt I would be caring about a sudden price drop along with stocks or a liquidity crisis; these are short-term problems, not long-term ones. Same can be said about many investments.
I probably agree that the brief drop in munis during the COVID liquidity crunch can essentially be ignored, but the more prolonged under-performance of munis relative to treasuries during the 70s/80s or 2008 makes a very real difference to a portfolio as a whole. For whatever amount of risk you decide is acceptable/appropriate, you could swap treasuries in for munis and hold more stocks to achieve a similar expected risk/return. If munis somehow allow you to sleep well with a riskier portfolio than you could with treasuries (and this additional risk is actually good for your situation), then that's fair, but I think it would be good to explain it that way so others can decide for themselves.
secondopinion wrote: Thu Apr 29, 2021 1:22 pm The difference of risk between equites and municipal bonds is massive, even if they carry similar risk types. Municipals have a very low default rate (and do not forgot that recovery of some principal happens as well); stocks definitely do not.
I never intended to say otherwise. It's that they sprinkle in a little bit of stock-like risk with your bonds but in my analysis do not sprinkle in enough stock-like returns, so you're better off sprinkling in some actual stocks.

In everything I've said until this point, I've gone along with the assumption that munis should provide greater returns than treasuries due to their greater risk. But (as you can see in my first link in this post), that most certainly has not been the case in the past (by about 1.7%/year). Even shifting the start date to 1983, they continued to under-perform by about 0.7%/year with similar risk. So the tax benefit has to be fairly large, which would be almost impossible with yields currently so low (plus treasuries are exempt from state tax, and the additional stocks you can hold are typically regarded as rather tax efficient). Or else the future has to look very different from the past.
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Re: Is the potential upside in munis worth the downside?

Post by secondopinion »

CuriousTacos wrote: Fri Apr 30, 2021 1:56 am If you're very heavily invested in fixed income, perhaps that's the scope of the comparison. But in the context of a portfolio with stocks, the fact that munis' credit risk is very likely correlated with stocks means you have to hold more munis to provide the same diversification (in terms of portfolio volatility or drawdown). So while munis may have a higher expected after-tax return than treasuries, a 70/30 stocks/munis portfolio probably does not have a higher expected return than a 75/25 stocks/treasuries portfolio (which has historically had similar risk). Comparison here

...

In everything I've said until this point, I've gone along with the assumption that munis should provide greater returns than treasuries due to their greater risk. But (as you can see in my first link in this post), that most certainly has not been the case in the past (by about 1.7%/year). Even shifting the start date to 1983, they continued to under-perform by about 0.7%/year with similar risk. So the tax benefit has to be fairly large, which would be almost impossible with yields currently so low (plus treasuries are exempt from state tax, and the additional stocks you can hold are typically regarded as rather tax efficient). Or else the future has to look very different from the past.
Two problems here with the analysis: one, the after-tax returns has not been considered in depth (taxes have been quite a bit higher in some cases in the past); two, municipals generally have a lower duration risk given equal maturities. The portfolio visualizer is not going to factor in either of these. I have seen many treasury versus other bonds comparisons to show credit risk is not worth it, and each one fails to consider duration differences (and in this case, also taxes). Generally, higher yield causes a lower duration.

To compare credit risk compensation, you must match durations.
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Re: Is the potential upside in munis worth the downside?

Post by Electron »

Here is a Morningstar Total Return Chart showing Putnam Income Fund (PINCX) with data going back to 1954.

This time frame includes periods of inflation as well as a wide range in interest rates. The performance over the entire period looks quite good.

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

One concern is that interest rates are very low today. It might take longer for a bond fund to recover following any sustained increase in interest rates.
Last edited by Electron on Fri Apr 30, 2021 5:44 pm, edited 1 time in total.
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Re: Is the potential upside in munis worth the downside?

Post by CuriousTacos »

secondopinion wrote: Fri Apr 30, 2021 11:51 am Two problems here with the analysis: one, the after-tax returns has not been considered in depth (taxes have been quite a bit higher in some cases in the past); two, municipals generally have a lower duration risk given equal maturities. The portfolio visualizer is not going to factor in either of these. I have seen many treasury versus other bonds comparisons to show credit risk is not worth it, and each one fails to consider duration differences (and in this case, also taxes). Generally, higher yield causes a lower duration.

To compare credit risk compensation, you must match durations.
Fair enough.

Regarding duration: the muni fund has an average maturity of 8.6 years and duration of 4.5 years and "is expected to maintain a dollar-weighted average maturity of 6 to 12 years". The treasury fund in that link currently has an average maturity of 5.2 years and duration of 5.1 years, and "is expected to maintain a dollar-weighted average maturity of 5 to 10 years". I then discovered that Portfolio Visualizer uses 5yr maturity treasury data prior to 1992, which is too short of a duration. Instead, a 50/50 mix of 10yr/short term treasuries has similar current duration and had nearly identical volatility in the past to the intermediate muni fund. Here's a comparison of just the bond funds, and here are the portfolios.

I then took the annual data from portfolio visualizer, tracked down average annual interest rates on 10-yr treasuries, average annual s&p 500 dividend yield, top federal tax rates for income and qualified dividends for each year of the analysis, and subtracted the tax on treasury bonds and the additional tax on dividends (due to holding 75% instead of 70% stocks), and the portfolio with the mix of 10yr/short treasuries ended up tied with the one with munis. So for someone in the highest tax bracket, we're splitting hairs for this time period. I'll admit I thought there would be a slight advantage for treasuries.

This doesn't go back far enough to include the beginning of the '70s bond bear market, so I don't know whether those additional years would have been worse/better for the munis. That's always the question mark around things with tail risk- are you gaining enough during the good times to adequately compensate for those tails? How much historical data do you need to feel like you've sufficiently represented these tails? Since treasuries have fewer tail risks to potentially underestimate, my perspective is that there isn't sufficient evidence to convince me that munis are better in a portfolio. Others may feel differently and think there isn't sufficient evidence that treasuries are better than munis in a portfolio given the tangible after-tax difference in yield.

I'll raise two other considerations that will not apply to everyone considering munis:
1. Most people in the highest tax brackets are in the accumulation phase. For accumulators, a very high stock allocation is typically regarded as optimal. So we're splitting even smaller hairs here since the bond allocation is probably low.
2. For high stock allocations, there are compelling arguments that long-term bonds are even better diversifiers. The long term muni fund does not currently have a very long duration, so you don't have much choice if you want to go this route.
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Re: Is the potential upside in munis worth the downside?

Post by secondopinion »

CuriousTacos wrote: Fri Apr 30, 2021 5:18 pm This doesn't go back far enough to include the beginning of the '70s bond bear market, so I don't know whether those additional years would have been worse/better for the munis. That's always the question mark around things with tail risk- are you gaining enough during the good times to adequately compensate for those tails? How much historical data do you need to feel like you've sufficiently represented these tails? Since treasuries have fewer tail risks to potentially underestimate, my perspective is that there isn't sufficient evidence to convince me that munis are better in a portfolio. Others may feel differently and think there isn't sufficient evidence that treasuries are better than munis in a portfolio given the tangible after-tax difference in yield.

...

I'll raise two other considerations that will not apply to everyone considering munis:
1. Most people in the highest tax brackets are in the accumulation phase. For accumulators, a very high stock allocation is typically regarded as optimal. So we're splitting even smaller hairs here since the bond allocation is probably low.
2. For high stock allocations, there are compelling arguments that long-term bonds are even better diversifiers. The long term muni fund does not currently have a very long duration, so you don't have much choice if you want to go this route.
For most people with considerable taxes, it is a net wash which they go for in the municipals versus treasuries; they role in the portfolio is slightly different given the treasury safe haven nature. I am not saying treasuries are bad; I am saying that treasuries may not be the only bond meant for one's portfolio. Except for a few other countries government bonds hedged on USD, municipals are usually the next safest USD bond investment; so, I lean towards the thought that their merits of their safety is very good (but not perfect). There is some tail risk with municipals; one has to choose whether they are okay with it (but it is not much risk in comparison to almost all other non-treasury bonds).

As to the other comments:

1. Right; it would be. However, those people are likely to be stuffing cash into taxable because they run out of tax-advantaged space a long time ago. If their investment income is considerable, then AMT can be a concern and most people want to avoid it. Municipals are perfect for that.

2. I would tend to agree that limited duration will not counteract stock drops well. But it also reflects that stock drops are probably not going to be as destructive to municipal yields either; remember, the quality is high and that the yield spikes for "risky" bonds are cushioned for municipals by the fact that municipals have a tax-adjusted yield. They will diversify, but they are probably not going to counteract stocks; but they are not likely to take much loss either.
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Re: Is the potential upside in munis worth the downside?

Post by finite_difference »

Disadvantages of munis that I don’t see often mentioned:

-If your income and/or tax bracket drop in retirement and it makes sense to switch from muni bonds to total bond, except selling the muni bonds will trigger capital gains taxes.
-Munis (VWIUX) are often less liquid than Vanguard Total Bond, and thus more susceptible to liquidity crunches.
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Re: Is the potential upside in munis worth the downside?

Post by ilan1h »

Another issue to consider is that future tax law changes may narrow many of the investment choices that wealthy investors currently have. This may make munis even more attractive to wealthy investors. As demand increases for munis it may provide a buffer to potential interest rate hikes or inflation.
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Re: Is the potential upside in munis worth the downside?

Post by grabiner »

finite_difference wrote: Sat May 01, 2021 12:46 am Disadvantages of munis that I don’t see often mentioned:

-If your income and/or tax bracket drop in retirement and it makes sense to switch from muni bonds to total bond, except selling the muni bonds will trigger capital gains taxes.
The capital gain or loss on switching bond funds is usually trivial, since bonds get almost all of their income from dividends. You may have a small capital gain if rates have fallen, or a small loss if they have risen.

You may have other needs to switch bond funds as well, whether you hold taxable bonds or muni bonds. If you move from a no-tax state to a high-tax state, you may want to sell your national muni fund to buy an in-state muni fund, or your corporate bond fund to buy a Treasury bond fund which also gets a state tax exemption.
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Re: Is the potential upside in munis worth the downside?

Post by canga »

midareff wrote: Thu Apr 29, 2021 8:42 am Downside risk is immaterial unless you sell.
I think this is a great point. If your muni-bonds are for buy and hold, then likely the risk is low.

However, I need some bonds available for rebalancing. Selling muni-bonds at a 10% at the start of the pandemic is not a great option, so I aim for no more than 20% of my bond allocation in munis. I can use Total Bond in my 401k as well as Intermediate Treasuries in taxable for rebalancing.
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Re: Is the potential upside in munis worth the downside?

Post by finite_difference »

grabiner wrote: Sat May 01, 2021 5:50 pm
finite_difference wrote: Sat May 01, 2021 12:46 am Disadvantages of munis that I don’t see often mentioned:

-If your income and/or tax bracket drop in retirement and it makes sense to switch from muni bonds to total bond, except selling the muni bonds will trigger capital gains taxes.
The capital gain or loss on switching bond funds is usually trivial, since bonds get almost all of their income from dividends. You may have a small capital gain if rates have fallen, or a small loss if they have risen.

You may have other needs to switch bond funds as well, whether you hold taxable bonds or muni bonds. If you move from a no-tax state to a high-tax state, you may want to sell your national muni fund to buy an in-state muni fund, or your corporate bond fund to buy a Treasury bond fund which also gets a state tax exemption.
I’ve heard that before but there was recently a thread on this topic and it made me think.

VWIUX has gone from $13.3 to $14.8 in about 10 years for a gain of about 11%.

Assuming you started with $100k of VWIUX then you’ll have about $11k in capital gains (more if you invested dividends.)

So you’ll need to pay 15% capital gains tax or $1650 per $100k in VWIUX holdings to switch to Vanguard Total Bond?

Is that trivial?

But maybe one is unlikely to simultaneously be in the 15% capital gains bracket and have VWIUX be a worse deal than Vanguard Total Bond?
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Re: Is the potential upside in munis worth the downside?

Post by midareff »

canga wrote: Sat May 01, 2021 7:10 pm
midareff wrote: Thu Apr 29, 2021 8:42 am Downside risk is immaterial unless you sell.
I think this is a great point. If your muni-bonds are for buy and hold, then likely the risk is low.

However, I need some bonds available for rebalancing. Selling muni-bonds at a 10% at the start of the pandemic is not a great option, so I aim for no more than 20% of my bond allocation in munis. I can use Total Bond in my 401k as well as Intermediate Treasuries in taxable for rebalancing.
At this point in time I think there are risks for all bond funds due to the potential for inflation and the already low interest rates. Munis are up this YTD and Total Bond is down. I just sold some munis in taxable and blew out a 3.0% 30 year mortgage with 20 years left. The only bad part was having to book $5K in capital gains.

Bonds fluctuate just like stocks and we are in a part of the cycle that has bond NAVs quite extended. A return to the mean for stocks and bonds would be very ugly for either, even a partial return.
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Re: Is the potential upside in munis worth the downside?

Post by secondopinion »

midareff wrote: Mon May 03, 2021 6:25 am Bonds fluctuate just like stocks and we are in a part of the cycle that has bond NAVs quite extended. A return to the mean for stocks and bonds would be very ugly for either, even a partial return.
We have little choice in the matter; if we knew when the the correction was, then it would have been too late. If you dislike the prospects of return, look at your personal situation and see if there are other personal investments you can make (e.g. more education) or just take some of these gains and make life easier. That is the point of money, is it not?

I am getting more education; it is the best bang for my buck given the circumstances. My taxable account has shrunk, but I do not care; it is my quality of life that counts. It will likely also improve earning potential overtime, and that is an added bonus to the enjoyment of learning.
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Re: Is the potential upside in munis worth the downside?

Post by SquawkIdent »

midareff wrote: Mon May 03, 2021 6:25 am
canga wrote: Sat May 01, 2021 7:10 pm
midareff wrote: Thu Apr 29, 2021 8:42 am Downside risk is immaterial unless you sell.
I think this is a great point. If your muni-bonds are for buy and hold, then likely the risk is low.

However, I need some bonds available for rebalancing. Selling muni-bonds at a 10% at the start of the pandemic is not a great option, so I aim for no more than 20% of my bond allocation in munis. I can use Total Bond in my 401k as well as Intermediate Treasuries in taxable for rebalancing.
At this point in time I think there are risks for all bond funds due to the potential for inflation and the already low interest rates. Munis are up this YTD and Total Bond is down. I just sold some munis in taxable and blew out a 3.0% 30 year mortgage with 20 years left. The only bad part was having to book $5K in capital gains.

Bonds fluctuate just like stocks and we are in a part of the cycle that has bond NAVs quite extended. A return to the mean for stocks and bonds would be very ugly for either, even a partial return.
+1

Agreed. I’m sticking with my munis. Just getting really, really short term. Collect minimal dividends and waiting for the longer term NAVs to move lower. Then move to longer term and wait for the NAV to recover. Rinse, repeat, rinse, repeat...marketing timing...I guess yes. But it works, every time as long as you have the time and patience to make it work. :sharebeer
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Re: Is the potential upside in munis worth the downside?

Post by midareff »

secondopinion wrote: Mon May 03, 2021 11:39 am
midareff wrote: Mon May 03, 2021 6:25 am Bonds fluctuate just like stocks and we are in a part of the cycle that has bond NAVs quite extended. A return to the mean for stocks and bonds would be very ugly for either, even a partial return.
We have little choice in the matter; if we knew when the the correction was, then it would have been too late. If you dislike the prospects of return, look at your personal situation and see if there are other personal investments you can make (e.g. more education) or just take some of these gains and make life easier. That is the point of money, is it not?

I am getting more education; it is the best bang for my buck given the circumstances. My taxable account has shrunk, but I do not care; it is my quality of life that counts. It will likely also improve earning potential overtime, and that is an added bonus to the enjoyment of learning.
As far as going to school to improve my education and get a better paying job ... LOL, I'm 73 and ten years retired. As far as your first statement; "We have little choice in the matter;" actually we have lots of choices. Our AA is set by us and we could as much or as little in asset classes as we want. If my life was much easier I'd have to give up the vertical, ambulatory and above top soil parts.
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midareff
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Re: Is the potential upside in munis worth the downside?

Post by midareff »

SquawkIdent wrote: Mon May 03, 2021 11:54 am
midareff wrote: Mon May 03, 2021 6:25 am
canga wrote: Sat May 01, 2021 7:10 pm
midareff wrote: Thu Apr 29, 2021 8:42 am Downside risk is immaterial unless you sell.
I think this is a great point. If your muni-bonds are for buy and hold, then likely the risk is low.

However, I need some bonds available for rebalancing. Selling muni-bonds at a 10% at the start of the pandemic is not a great option, so I aim for no more than 20% of my bond allocation in munis. I can use Total Bond in my 401k as well as Intermediate Treasuries in taxable for rebalancing.
At this point in time I think there are risks for all bond funds due to the potential for inflation and the already low interest rates. Munis are up this YTD and Total Bond is down. I just sold some munis in taxable and blew out a 3.0% 30 year mortgage with 20 years left. The only bad part was having to book $5K in capital gains.

Bonds fluctuate just like stocks and we are in a part of the cycle that has bond NAVs quite extended. A return to the mean for stocks and bonds would be very ugly for either, even a partial return.
+1

Agreed. I’m sticking with my munis. Just getting really, really short term. Collect minimal dividends and waiting for the longer term NAVs to move lower. Then move to longer term and wait for the NAV to recover. Rinse, repeat, rinse, repeat...marketing timing...I guess yes. But it works, every time as long as you have the time and patience to make it work. :sharebeer
Very much agreed..... I've pulled my weighted effective duration down to 3.79 years. Bill Bernstein's short bonds liability matching and the rest equities. Other than that I don't see a place to hide. Warren Buffet acknowledged he seems inflation blooming in all his businesses at his address this weekend.... even the hand car wash just went from $25 to $30 and the local eatery just raised the lunch chicken special by $2. It's here. Rode IT Corporates up 10% last year now in ST. Staying the course doesn't mean hand around to take a beating when it can be avoided.
secondopinion
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Re: Is the potential upside in munis worth the downside?

Post by secondopinion »

midareff wrote: Mon May 03, 2021 2:10 pm
secondopinion wrote: Mon May 03, 2021 11:39 am
midareff wrote: Mon May 03, 2021 6:25 am Bonds fluctuate just like stocks and we are in a part of the cycle that has bond NAVs quite extended. A return to the mean for stocks and bonds would be very ugly for either, even a partial return.
We have little choice in the matter; if we knew when the the correction was, then it would have been too late. If you dislike the prospects of return, look at your personal situation and see if there are other personal investments you can make (e.g. more education) or just take some of these gains and make life easier. That is the point of money, is it not?

I am getting more education; it is the best bang for my buck given the circumstances. My taxable account has shrunk, but I do not care; it is my quality of life that counts. It will likely also improve earning potential overtime, and that is an added bonus to the enjoyment of learning.
As far as going to school to improve my education and get a better paying job ... LOL, I'm 73 and ten years retired. As far as your first statement; "We have little choice in the matter;" actually we have lots of choices. Our AA is set by us and we could as much or as little in asset classes as we want. If my life was much easier I'd have to give up the vertical, ambulatory and above top soil parts.
In your case, I guess education to get a better job is probably not worth it. What I mean by "we have little choice in the matter" is that we can neither control or guess what the market will do, nor can we control that both stocks and bonds could both have terrible returns in a correction. I know that the asset allocation is controllable, but I am referring to factors that we just cannot control.
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
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