Max % of tax exempt bonds in portfolio?

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conundrum
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Joined: Sat May 09, 2009 7:00 pm

Max % of tax exempt bonds in portfolio?

Post by conundrum » Sun Apr 15, 2018 3:26 pm

Our asset allocation goal is 50% stocks and 50% bonds. With a large portion of our portfolio being in a taxable account we need a good chunk of bonds in taxable. With pension issues and some shakiness in municipal finances is there a maximum % that it is reasonable to have in muni bonds? If we go with all muni bonds in taxable we would have 25% of our entire portfolio in muni bonds. Is 25% too high? We will be in the 24% tax bracket this year and our current muni bond investment is in VWIUX ( Vanguard national intermediate bond fund) Any thoughts or advice?

Thanks
Drum :sharebeer

PFInterest
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Re: Max % of tax exempt bonds in portfolio?

Post by PFInterest » Sun Apr 15, 2018 3:34 pm

There is no set answer. 50% of FI seems like an easy place to draw the line.

am
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Re: Max % of tax exempt bonds in portfolio?

Post by am » Sun Apr 15, 2018 3:36 pm

conundrum wrote:
Sun Apr 15, 2018 3:26 pm
Our asset allocation goal is 50% stocks and 50% bonds. With a large portion of our portfolio being in a taxable account we need a good chunk of bonds in taxable. With pension issues and some shakiness in municipal finances is there a maximum % that it is reasonable to have in muni bonds? If we go with all muni bonds in taxable we would have 25% of our entire portfolio in muni bonds. Is 25% too high? We will be in the 24% tax bracket this year and our current muni bond investment is in VWIUX ( Vanguard national intermediate bond fund) Any thoughts or advice?

Thanks
Drum :sharebeer
I also have a large amount of munis. I also worry about fiscal/pension issues, especially during the next crisis. But I think the market prices those risks in. The rewards for holding munis in higher brackets makes it worthwhile. Vanguard interm. Muni fund invests In credit worthy borrowers for the most part, and if I remember correctly, they have their own analysts and don’t rely on rating agencies. The fact that this fund is actively managed by vanguard also gives me comfort.

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BuyAndHoldOn
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Re: Max % of tax exempt bonds in portfolio?

Post by BuyAndHoldOn » Sun Apr 15, 2018 3:39 pm

What are your concerns if you went with the Maximum Muni allocation you are considering? I ask because: Investment Grade municipal bonds have a very low rate of default, and [from what I hear/recall reading] most "defaults" still resulted in investors getting their money back. Determining Investment Grade status means evaluating things like Pension Issues and general finances by the Credit Agencies.

If you are talking about High Yield municipal bonds, that is something I have never evaluated and probably very different from a risk/return profile.

You can backtest portfolios using PortfolioVisualizer.com. You can use the Ticker MUB or another fund if VWIUX doesn't go back far enough, as (I believe) MUB follows the same index.


....you can also compromise with other debt/fixed income securities as well. I have treasuries in my taxable account (heck, even some Total Bond) to ensure further diversification.

mega317
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Re: Max % of tax exempt bonds in portfolio?

Post by mega317 » Sun Apr 15, 2018 4:06 pm

I think 25% of your portfolio, and half of your bonds, in munis is totally within reason. Also note that in the 24% bracket the yields on VWIUX and VBTLX are close. If you're uncomfortable just add in a little total bond in taxable.

am
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Re: Max % of tax exempt bonds in portfolio?

Post by am » Sun Apr 15, 2018 4:32 pm

mega317 wrote:
Sun Apr 15, 2018 4:06 pm
I think 25% of your portfolio, and half of your bonds, in munis is totally within reason. Also note that in the 24% bracket the yields on VWIUX and VBTLX are close. If you're uncomfortable just add in a little total bond in taxable.


2.96 vbtlx versus 3.42 vwiux int. Muni TEY at 24% bracket and 4.1 at 32% bracket current sec yields. Difference of 230 dollars at 24% bracket on 50k and and 700 dollars at 32% bracket.

UpperNwGuy
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Re: Max % of tax exempt bonds in portfolio?

Post by UpperNwGuy » Sun Apr 15, 2018 4:38 pm

50% of my bond portfolio is in Vanguard's Intermediate-Term Tax-Exempt Fund. I am in the 24% Federal tax bracket.

retiredjg
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Re: Max % of tax exempt bonds in portfolio?

Post by retiredjg » Sun Apr 15, 2018 4:55 pm

If you feel your bond allocation that must be in your taxable account in munis is too high, there are a couple of alternatives. You could use CDs as part of your bond allocation. Or I Bonds.

Actually in the 24% tax bracket, I'm not sure that you really require tax-exempt bonds. Chances are before the tax cuts, you were in the 28% bracket where munis were probably a good idea.

jdb
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Re: Max % of tax exempt bonds in portfolio?

Post by jdb » Sun Apr 15, 2018 4:55 pm

We are in a tax rate above 30 percent, and 100 percent of our taxable fixed income allocation is in muni bonds, a combination of individual muni bond laddder and Vanguard Short term, Intermediate term and Long term muni bond funds in a 2:1:1 ratio. Works for us. Good luck.

dognose
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Location: Arizona

Re: Max % of tax exempt bonds in portfolio?

Post by dognose » Sun Apr 15, 2018 7:00 pm

I've had 100 percent of my fixed income portfolio in munis for the last 25 years, with no problems. I have no plans to make any changes. Vanguard Intermediate Term Tax Exempt works just fine.

conundrum
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Re: Max % of tax exempt bonds in portfolio?

Post by conundrum » Sun Apr 15, 2018 7:51 pm

Thanks for all the advice and wisdom. As our tax bracket has recently dropped, both from the new tax law and lower income we have been considering other bond alternatives in taxable as well

Drum :D

bck63
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Re: Max % of tax exempt bonds in portfolio?

Post by bck63 » Fri Oct 19, 2018 5:18 pm

This is way late but I just want to note that the Vanguard Tax-Managed Balanced Fund (VTMFX) has it's entire bond portion (slightly greater than 50% of the fund's investments) in municipal bonds. All the bonds in my taxable accounts are in municipal bonds.

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