Author Topic: Advice on which Muni funds to buy  (Read 5486 times)

pat

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Advice on which Muni funds to buy
« on: November 11, 2018, 11:55:38 AM »
I am looking for Muni Funds to invest in, came across this article - https://contrarianoutlook.com/5-tax-equivalent-yields-up-to-10-4/

I need this to invest in after tax account.

Fat Tony

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Re: Advice on which Muni funds to buy
« Reply #1 on: December 30, 2018, 11:16:06 PM »
I go with the safe and boring, lower-yield MUB. I briefly considered CMF to avoid CA state taxes as well, but even in the highest tax bracket, MUB came out ahead and provided better diversification. (https://www.financialsamurai.com/forums/fixed-income/muni-bond-etfs/msg1954/#msg1954) VTEB and TFI are also good choices. TFI seems to have changed to including AMT-item munis as well.

Also, note that your article is from 2017 - pre-TCJA tax reform (with the old brackets), plus it doesn't include the value of avoiding the 3.8% NIIT which will always be present in the upper brackets. I also always wondered if the value of AMT-free muni funds (as opposed to muni funds with some bonds that are taxed in AMT), would decline now that the SALT deduction is so heavily capped that lots of high earners in CA, NY, NJ, etc. are not going to be in AMT anymore. The effect of those bonds doesn't seem to be significant enough, or maybe it's such an esoteric topic that only the most obsessive of muni nerds are paying attention.

ManInAVan

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Re: Advice on which Muni funds to buy
« Reply #2 on: December 31, 2018, 06:03:17 PM »
That's some helpful info thanks.  I've been looking at buying Muni's also through Fidelity, but the numbers are pretty confusing.  For example, it says it has a 5% semiannual coupon and doesn't expire for something like 6 years, but it also says the yield to maturity is more like 2.4%. 

I'm so confused by these and how that could be possible.  Is it just trading that high above it's initial value?  that still doesn't seem to account for the difference in the yield though.  I'm sure there's something I'm missing, and I've just gotten confused somehow.


AdamJane

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Re: Advice on which Muni funds to buy
« Reply #3 on: December 31, 2018, 07:32:11 PM »
That's some helpful info thanks.  I've been looking at buying Muni's also through Fidelity, but the numbers are pretty confusing.  For example, it says it has a 5% semiannual coupon and doesn't expire for something like 6 years, but it also says the yield to maturity is more like 2.4%. 

I'm so confused by these and how that could be possible.  Is it just trading that high above it's initial value?  that still doesn't seem to account for the difference in the yield though.  I'm sure there's something I'm missing, and I've just gotten confused somehow.



My wife and I are probably one of the most financially conservative couples on this blog. We have NO money in the stock market. If your State is financially strong then I would buy individual Municipal bonds. Currently 4% munis are around PAR ($100).
We have been buying Munis since 2010 to prepare for layoffs. We became FI at 49 and we are now 54. Our NY individual Muni bonds generated 89K Fed and State tax free this year. We sleep very well at nights since we don’t have to worry about the market.

After years of buying municipal bonds, we learned that banks and brokers charge 1% to 2% more per muni bond compared to self service brokerage like Fidelity. Fidelity only charges 0.10 markup. Citibank charges 1% and HSBC charges 1.75% markup. For example, a muni bond at Fildelity may cost $100 PAR but it would be $102 at a bank. We no longer buy bonds via a bank or broker. We NOW only buy our munis in Fidelity.

Sam wrote a great post on zero coupon muni bonds which pays interest and principle when a bond matures. This would be great if you don’t need yearly income and maybe saving for a future event.
https://www.financialsamurai.com/the-allure-of-zero-coupon-municipal-bonds/

See the following post for my comments on muni bonds. Search for “Adam and Jane”
https://www.financialsamurai.com/after-tax-investment-amounts-by-age-to-retire-early/#comments

My Muni bonds criterias
1. Ratings is extremely important. I tend to avoid investment grade which is a B. I look for bonds that are rated a min of upper med grade (single A).
Best quality – AAA
High Quality – AA
Upper Med Grade – A
See this site for the ratings chart – http://www.munibondadvisor.com/rating.htm

2. A coupon on a bond is the annual interest payment that the bondholder receives from the bond's issue date until it matures or calls. Many bonds are callable after 10 years of issued. I look for bonds for a min of 4% coupon. For example, a min bond is $5,000 and with Coupon rate of 4% it will pay $200 tax free annually or $100 twice a year every 6 months.


3. Buy what you know.
I like MTA (mass transit), water, Dorm Authorities for schools and hospitals. Make sure the school and hospitals are well known. People will always need these facilities. Bonds will vary from state to state so buy what you know in your state.

4. Tax exemption. Make sure it is totally tax free. Check the bond details.
Federally taxable – NO
Subject to AMT – NO


5. Insured
A muni bond is insured then the bond is safer. Insured bond are tough to find and they are usually a bit more expensive.


6.YTW (Yield To Worst or Yield To Call) greater than 3.75%. In a 33% tax bracket, it is like a 5.7% CD.
YTW is the min the bond will earn when a bond is called. Most bonds are callable after 10 years of being issued so I dont really pay attention to maturity date. Bond prices changes daily so I like to buy bonds in x amounts. Dont spend all your money on just one bond. Currently, I can buy a 4% NY Muni bond at PAR ($100). I check Fidelity almost every day for muni bonds for my State for any good buys. In the end, just be happy with the yield and dont go crazy if the bond price drops. If you hold the bond until it is called or matures then you will get the face value back to avoid lost of principle except for the premium paid.
I like to sort all the munis for my state with YTW in descending order which will display the highest yield at the top of the list. This makes it easier to select a bond.

7.Yield to Maturity (YTM)
YTM is the total return on a bond if the bond is held until it matures. For NY, I rarely see an individual muni bond that is not callable which the bond will be able to reach maturity. Since the bonds I buy are mainly callable, I only look for the highest YTW rate of the bonds.

8.Call dates, mature dates and month interest is paid.
You can buy bonds with different call dates and maturity dates to create a bond ladder. This way your bonds will return your principle at different years so that all of your money is not locked to a specifc year.
I also look for bonds to pay on different months of the year so that I will get bond payment every month. This is not a show stopper but it is nice to get payments every month.


9.Price of the bond.
Try to buy bonds at face value of $100 (PAR) or less. If you have to pay a premium then pay at most 1-2 dollars. For example, a 4% bond at $102 will take 6 months to break even. When this bond is called or matures, only the face value is returned to you. If you paid a premium then it will result in a lost of principle. This is not a big deal if especially you are happy with the yield and the interest you received. The higher the price you pay over PAR will result in lower YTW and YTM returns.

10. How to search for bonds in Fidelity
In Fidelity, I do a search for a min YTW of 3.75% in descending order to see the highest yields at the top of the list. Click on the YTW column on the search results page to sort them. Once you get the search working save it in Fidelity and book mark it in your browser! I use the browser book mark everyday to check for new listing of munis.
To search for bonds in Fidelity:
-Click on the “News and Research” tab
-Select Fixed Income, Bonds & CDs
-Click on the Bonds tab
-Click on the Municipal tab
-Set YTW to min 3.75
-Leave YTW max value alone. It is set to max value(default)
-Select your State. If your State is tax free like Florida then you buy muni bonds from any State for tax free bond interest.
-Click on show more criterias.
-Set Sinking Fund Protection to All. It defaults to Yes which will display a lot less muni bonds. Sinking just means that the bond issuer will start paying back several years before the maturity date. Sinking sounds bad but it is not.
-Set Zero Coupon to No if you are not interested in them.
-Subject to Alternative Minimum Tax-defaults to NO
-Exempt From Federal Tax-defaults to YES
-Click on “See CUSIPs” button at the bottom of the screen.
-On bond listing screen, click on the YTW heading on top on the column to sort it in desending order. Now you will see the highest yielding bonds at the top.
-Save this search URL in your browser

Adam
« Last Edit: December 31, 2018, 07:42:35 PM by AdamJane »

ManInAVan

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Re: Advice on which Muni funds to buy
« Reply #4 on: December 31, 2018, 08:29:38 PM »
Wow, Adam and Jane that is incredibly helpful!  I read the articles, went through those comments, and have my search saved!  :D

There are a lot fewer offerings to consider with this criteria which makes a lot more sense than what I was looking at.  Thanks for sharing your experience!

Do you also invest in treasuries or corporate bonds, or do you mostly stick to Munis?

AdamJane

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Re: Advice on which Muni funds to buy
« Reply #5 on: December 31, 2018, 08:59:48 PM »
Wow, Adam and Jane that is incredibly helpful!  I read the articles, went through those comments, and have my search saved!  :D

There are a lot fewer offerings to consider with this criteria which makes a lot more sense than what I was looking at.  Thanks for sharing your experience!

Do you also invest in treasuries or corporate bonds, or do you mostly stick to Munis?

You are welcome!

In the beginning, I made expensive mistakes by focusing on the YTM returns and buying 5% bonds for $108. The YTW was 3%-3.5% so I share my experiences to save people money. My 5% bonds were called and never reached maturity. I should have looked for 4% coupons instead and closer to PAR with YTW around 4%. Why make mistakes when you can learn to avoid them? The financial advisors were no help explaining the YTW and YTM returns so I got educated the hardway. That is why I love buying munis from self serve brokerages like Fidelity. I bypass the middle man to avoid the extra markups from banks and brokers.

Since I want to avoid paying additional taxes, I only buy Munis.

Adam

Deanna - Ms. Fiology

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Re: Advice on which Muni funds to buy
« Reply #6 on: April 29, 2019, 06:00:03 PM »
Adam, you seem quite knowledgeable on this topic and I"m intrigued. BTW, thank you for the detailed post.

Anyway, I know very little about muni bonds but they seem like a very viable hedge against inflation. Would you recommend muni bonds for someone who is still 14 years out from retirement?

AdamJane

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Re: Advice on which Muni funds to buy
« Reply #7 on: April 29, 2019, 07:49:19 PM »
Adam, you seem quite knowledgeable on this topic and I"m intrigued. BTW, thank you for the detailed post.

Anyway, I know very little about muni bonds but they seem like a very viable hedge against inflation. Would you recommend muni bonds for someone who is still 14 years out from retirement?

Hi Deanna,

One thing I learn in life is that you can’t make everyone happy. Some people will love muni bonds and some will hate it.  My wife and I love it because it provides a tax and stress free passive income. I am 54 and I will retire at the end of this year. I still plan to keep my munis and let it generate income for us. If I knew about munis when I was 30 years old then I would have purchased them.

You have to know your risk level. I have seen my father lose over 19K and uncles lose over 80K each in the stock market. I also lost some during the dot.com days so I no longer have any money in the market since 2000. We are basically CD people and if CDs were 5%, then most of our cash would be in CDs. It was because CDs were paying so little interest (less than 1%) that we started to invest in munis in 2010.

For my younger millennials cousins, I recommended that they max out their 401K with Vanguard S&P 500 index fund and buy some munis with their after tax savings since CD and savings rates are so low from the brick and mortar banks. Why keep 100K min (actually it was recently changed to 75K) in HSBC to be a premier member in a low interest CD or savings account? Since my cousins want a min of 100K there, I recommended that they invest that 100K in munis which will generate $3.5K to $4K tax free for doing NO WORK. The same 100K in a 1% CD will pay out 1K and it will be roughly $650 after taxes.

So YES, I recommend you invest in some munis even though you are 14 years from retirement.

Adam

Deanna - Ms. Fiology

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Re: Advice on which Muni funds to buy
« Reply #8 on: April 30, 2019, 10:21:57 AM »
Thank you, Adam!

Everything you wrote makes sense and is very helpful. While I have somewhat of a high-risk tolerance, I like the diversity that munis seem to offer. I think I will follow the advice you give to your younger millennial cousins.