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A Low-Risk, Tax-Free 6% OpportunityBy
Wednesday, April 20, 2011
I've been investing in municipal bonds for about 25 years... and my municipal portfolio is now worth several million dollars.
I started buying them based on the advice of Sid, my surrogate Jewish uncle and tax advisor.
"Stocks, schmocks," he told me when I asked him about investing in public companies. "Buy triple-A-rated, insured municipal bonds. You'll get rich without a sleepless night."
Sid believed deeply in municipal bonds – which are essentially loans made to state and municipal governments. He had acquired an eight-figure net worth in municipal bonds and he lived off the income – extremely well – until the day he died.
When I looked at the facts, I could understand Sid's preference for them.
From 1871 to 2001, stocks returned an average of 8.8%. For someone in my tax bracket, this translated to a net return of about 6% a year.
Municipal bonds during the same period gave me a 5% tax-free yield. The one-percentage-point difference wasn't worth the extra "stock market" risk to me.
This strategy paid off.
Municipal bonds gave me a guaranteed return that would gradually double my wealth. (At 5% compounded annually, my money doubled every 15 years.)
I didn't have to worry about the ups and downs. I bought them. I held them. And when they matured, I took my profits and bought more.
What was better, I didn't have to study them. So long as they were rated triple-A and insured, I felt sure they would not default. And they didn't. In the entire 25 years I had bonds, none defaulted.
And when the stock market crashed in 2008, I was safe. Because I had my money in municipal bonds and not in stocks, I didn't lose a penny to the crisis.
But that was then and this is now.
As you've surely seen in the news, municipalities across America are experiencing severe cash-flow problems. Their revenues – bloated by inflated tax returns – are now shrinking. And their expenditures are not.
You can see experts on the television and in the newspapers – almost daily – predicting many states, cities, and counties will default.
Here's the thing: Despite the scary news reports and nightmarish predictions... I'm not selling my municipal bond portfolio. (I've even added to it recently.)
Right now, municipal bonds are paying higher interest rates than they have in years.
Over the past 50 years, the market gave muni bonds a higher valuation than government bonds, mainly due to their tax advantages. So municipal bonds traded with lower interest rates than Treasury bonds, usually by about 15%.
But today, muni bonds trade at a LOWER valuation than Treasury bonds... and their yields are about 20% HIGHER.
Recently, my Palm Beach Letter research team – Tom Dyson and Nirav Desai – found some very attractive municipal bond opportunities.
For example, parking lot bonds from the University of Florida mature in six years and are paying a 6% tax-free yield. This is worth almost 10% a year to someone like me in the top tax bracket... or 70% over the life of the bond.
There's simply no way the University of Florida will default on these bonds.
You can also find municipal bonds backed by real estate or even issued and guaranteed by private companies like FedEx. It's hard to imagine these bonds will ever go broke. And they're offering the highest yields in years.
The bottom line is, municipal bonds are not the no-brainer investments they were five years ago. But if you do your research, they can still be one of the safest, high-yielding retirement investments.
First, don't blindly buy municipal bond funds or ETFs. You should only buy the highest quality municipal bonds you can find, like the University of Florida parking bonds. There will never be a shortage of demand for parking spaces on campus, so you know the administrators can raise prices if they need to. But even at current rates, the administrators can easily cover the interest payments to bond holders.
For help finding municipal bond issues, call your broker and ask a municipal bond specialist to suggest some safe bond ideas. We've also put the contact details of two bond experts in the nearby sidebar. They can help you, too.
Second, hold your municipal bonds to maturity and don't let short-term volatility scare you. I simply put them away, collect my interest, and wait for them to mature at face value.
By following these two simple rules, you can still make a safe, tax-free 6% return on your money in municipal bonds... without taking any stock market risk.
In today's low interest rate world, it's the best deal around...
Good investing,
Mark Ford
Further Reading:
Our own Doc Eifrig has told DailyWealth readers about the opportunity muni bonds are presenting:
"If you're interested in collecting this income, I encourage you to act soon. It won't be available for long."
"This is exactly the thing the herd does at exactly the wrong time. Everyone's running for the exits just as things are turning up."
"The big opportunity is shrinking. But it's still a great deal."
Market NotesBUFFETT VERSUS GOLD: NO CONTEST! One of the wild things about the 10-year mega uptrend in gold is the amount of detractors who speak out against the metal... and anyone who owns the timeless form of "real money." Many folks can't stand the thought of owning gold. It's a worthless antique to them.
Chief among these detractors is Warren Buffett... one of the smartest, most successful investors in history. Buffett has scoffed at the idea of owning gold many times. But we must note how listening to Buffett has been a losing deal over the past eight years...
Today's chart displays the performance of Buffett's legendary holding company, Berkshire Hathaway (black line) since stocks bottomed in 2003... versus the performance of gold during the same time (gold line).
Since the stock market began climbing out of its bear market back in 2003, Buffett's company has gained around 75%. Gold, on the other hand, has gained nearly 350%. While we're fans of Warren's wealth-building ability, we're even bigger fans of listening to the message of the market. Every day for the past eight years, it's been saying, "You're missing the boat, Warren."
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