It’s not easy being a bond investor these days. Bonds are generally considered conservative investments. But as we’ve seen this year, even conservative investments like bonds can lose money. Having said that, it’s not all doom and gloom for bondholders. Instead, I think there is a potential opportunity in the municipal bond market.
Here are three reasons why I like municipal bonds:
Reason #1 to like munis: tax-free interest
Municipal bonds are issued by states and local municipalities to finance the construction of roads, schools, and other infrastructure. The interest they earn is generally exempt from federal income taxes, and if it is issued in the city or state in which you reside, it may also be exempt from state and local taxes. Meanwhile, interest on privately held municipal bonds is taxable unless otherwise noted.
Tax-free income can be especially helpful for retirees or highly-paid executives who have other income, such as pensions, annuities, and deferred compensation plans, because it can help prevent “class shifting,” when a taxpayer transitions to the next tax bracket. . Nobody likes creep, especially a support creep. That’s why I turn to municipal bonds for their tax-free interest.
keep that in mind While municipal interest is generally tax-free, capital gains from the sale of a bond, if any, will be taxable. Some investors’ income may be subject to the federal Alternative Minimum Tax.
Reason #2 to like munis: be greedy when others are scared
So far in 2022 he has not been kind to municipal bonds. As of April 12, 2022, the S&P Municipal Bond Index is down 6.78% for the year. Investors may have been spooked by events in Ukraine, inflation and the prospect of higher interest rates.
This is reason number 2 why I like municipal bonds. Investment firm Lord Abbett’s research looking at the last 12 years has shown that there have been six distinct exit cycles for munis, and in the subsequent 12-month period the performance was overwhelmingly positive. Past performance is no guarantee of future results, but strong performance has generally followed large outflows of municipal bond funds.
Reason #3 to Like Munis: Low Default Risks
According to Moody’s Investor Service’s annual summary of US municipal bond defaults and recovery, between 1970 and 2020, the default rate (when a bond fails to pay interest or principal) remains “uncommon” overall for municipal bonds, by 0.08% over the year. study. Even during the Covid pandemic through 2020, according to investment firm VanEck, there were only two municipal bond defaults, and none were related to the virus.
Municipal bonds are not risk free, but the low risk of default is reassuring to my conservative clients.
Municipal bonds have their advantages and disadvantages and are not suitable for all investors. However, given the reasons listed above, I think municipal bonds can help as part of a diversified portfolio.
There are many ways to buy municipal bonds, including buying one bond fund, multiple different bond funds, or individual bonds. There are short-, medium-, and long-term municipal bonds, as well as different types, such as general obligation and income bonds. There are advantages and disadvantages to each approach. If you are not sure, I advise you to talk to a professional.
For more information on investing in municipal bonds or for a free investment review of your portfolio, email me at firstname.lastname@example.org.
Disclaimer: Investors cannot directly purchase an index. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Investment advisory and financial planning services offered through Summit Financial, LLC, an SEC registered investment adviser. Income is generally free of federal and state taxes for residents of the issuing state. While the interest is tax free, capital gains, if any, will be taxed. Some investors’ income may be subject to the federal Alternative Minimum Tax. This newsletter is provided for informational purposes only and is not intended as specific advice or an offer to buy or sell any securities. Summit Financial, LLC and its affiliates do not provide tax or legal advice.
CFP®, Financial Summit, LLC
Michael Aloi is a CERTIFIED FINANCIAL PLANNER™ Professional and an Accredited Wealth Management Advisor℠ with Summit Financial, LLC. With 21 years of experience, Michael specializes in working with executives, professionals, and retirees. Since joining Summit Financial, LLC, Michael has developed a process that emphasizes the integration of various facets of financial planning. Supported by an in-house team of wealth and income tax specialists, Michael offers his clients coordinated solutions to disparate problems.
Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Advisor, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended to be legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent legal or tax advisors. Individual investor portfolios should be constructed based on the individual’s financial resources, investment objectives, risk tolerance, investment time horizon, tax situation, and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Links to third party websites are provided solely as a convenience and for informational purposes. Summit is not responsible for information contained on third party websites. Summit’s financial planning design team admitted attorneys and/or CPAs, who act solely in a non-representative capacity with respect to Summit clients. Neither they nor Summit provide tax or legal advice to clients. All tax returns contained in this document were it is not intended or written to be used, and may not be used, for the purpose of avoiding US federal, state, or local taxes.