can you be too safe w/ muni bonds? - municipalbonds.com
Can You Be Too Safe With Muni Bonds?
Most investors are aware that they can risk too much, but few realize that playing it too safe also has its own set of risks. By taking on less risk, an investor may compromise their ability to achieve their target performance goal, such as a retirement goal, for their portfolio.
Municipal bonds are widely regarded as a safe-haven asset class since government backing provides better credit ratings than most corporate bonds. Exemptions from federal, state, and local income taxes further create a higher after-tax yield than comparable private-sector bonds. These attributes have helped muni bonds perform extremely well over the past couple of years as investors sought out safe-haven asset classes amid the drop in equity prices.
Muni Bonds vs. S&P 500 Figure 1 – Muni Bond v. S&P 500 Returns in 2015 – Source: StockCharts.com
Below, MunicipalBonds.com takes a look at a few common ways investors may be playing it too safe with muni bonds and some key changes they may want to consider.
Overallocating Muni Bonds
The first mistake that investors often make is overallocating their portfolio to municipal bonds during troubled times in order to reduce their risk.
A number of research studies have shown that investors sacrifice between 1.2% and 4.3% of their returns due to attempts at market timing – also known as the behavior gap. According to Betterment’s analysis, investors trying to time the market over 20 years risk losing out on $117,700 in aggregate value for every $100,000 invested over the time period. This calculation was made using one of the more conservative estimates of 1.56%.
Betterment Estimated Growth Figure 2 – Estimated Cost of Timing the Market – Source: Betterment
Investors may be tempted to overallocate their portfolio to muni bonds during an economic downturn, but doing so could cost them money over the long run. Often times, it’s a much better idea to keep a steady allocation that is set up to meet a target goal over time rather than trying to time the market and avoid losses. Research suggests that few people are able to do the latter successfully over the long term.
Short-Duration Mistakes
The second mistake that investors often make is focusing on short-duration municipal bonds during troubled times in order to reduce their risk.
Duration is an important measure of risk when it comes to all types of bonds, including muni bonds. It’s a measures of how long, in years, it takes for the price of a bond to be repaid by internal cash flows. Bonds with longer durations carry greater risk and experience more price volatility than bonds with shorter durations. After all, longer durations mean that bondholders are tied to the bond’s interest rate over a longer period of time.
Interest Rate Effect on Bonds Figure 3 – Impact of Interest Rate Changes Based on Duration – Source: Blackrock
The problem with moving into short-duration as a safer investment than longer-duration muni bonds is that there’s an increased reinvestment risk. In other words, an investor may not be able to reinvest the proceeds of a short-term bond into a comparable bond when it matures. Longer-duration muni bonds have lower reinvestment risk because there’s a longer period of time before the bond matures and the interest rate differential may be minimal.
The Bottom Line
Most investors are aware that their portfolio can be too risky, but playing it safe has its own costs. Often times, investors purchase short-duration municipal bonds as a safe-haven asset. Market timing has a long-term cost known as the behavior gap, while short-duration bonds may pose a reinvestment risk. Investors should carefully consider these risks when evaluating muni bonds – especially during an economic downturn.
Best Online Brokers: Fidelity Wins In Barron’s 2016 Survey I have an account with TD Ameritrade and think for MF investors it is not a good choice.
1. For NTF funds it requires holding for 6 months to avoid fee.
2. For transaction fee funds you pay $50 twice when you buy and when you sell the fund.
3. Research information for MF is much worse comparing with Fidelity and Schwab.
4. You never know whether a load is waived for MF until you enter transaction.
5. Portfolio analysis is really bad.
6. The choice of NTF ETF is very limited.
I am thinking about moving to another brokerage but have not decided yet which one.
Q&A With Joel Tillinghast, Manager, Fidelity Low-Priced Stock Fund
Guggenheim Total Return Bond Fund Crushes Peers FWIW: Load waived at Schwab. $100 mini for regular and IRA. Also available as an ETF, viz., GTO but thus far with very low volume.
American Funds Says Low Fees, Manager Ownership Can Save Actively Managed Funds C shares are called "level load" for a reason. They charge higher expenses that are used to compensate the broker.
In addition, " American Funds Distributors pays 1% of the amount invested to dealers who sell Class C shares", which is why they'll also impose "A contingent deferred sales charge of 1% ... if Class C shares are sold within one year of purchase." That's from the typical American Funds prospectus.
However, unlike most C shares, those sold by American Funds ultimately convert to the noload F-1 class of shares.
Speaking of F-1 shares, they should be available via a fee-only advisor. (In the 90s, you could buy them without an advisor via some of the smaller discount brokerages.) Going through a fee-only advisor to gain access to noload shares isn't unique. You have to do that for DFA funds also.
Old_Skeet is correct - loads (other than level loads on C shares) don't get charged over and over, at least so long as one exchanges within the same fund family. (There used to be a measure of reciprocity, where a load family would waive loads if the purchase was an exchange from a load fund of any family, but that's nearly nonexistent now.)
That's a strong argument for keeping (not adding) money in a good load family. The load is a sunk cost. No additional load, and access to a variety of funds.
American Funds Says Low Fees, Manager Ownership Can Save Actively Managed Funds Thanks Ted. Being that the basic premise of the article is..."In a nutshell, it comes down to lower fund expenses and higher portfolio manager ownership of the fund.", I thought that the load should have been mentioned. Opting for the C shares would also opt the buyer out of owning a fund with lower expenses. It's good to know that American Funds makes good use of their loads to fund their infomercials. Or, are those funded by their 12B fees?
American Funds Says Low Fees, Manager Ownership Can Save Actively Managed Funds @Soupkitchen: That's true if you buy the A shares, however C shares have no front- load a higher expense ratio, and a deferred charge of
1% if you sell the fund within a year. Nice to see you back on the MFO Board.
Regards,
Ted
Q&A With Joel Tillinghast, Manager, Fidelity Low-Priced Stock Fund
American Funds Says Low Fees, Manager Ownership Can Save Actively Managed Funds
Best Online Brokers: Fidelity Wins In Barron’s 2016 Survey
Sequoia: "under review" by Morningstar My take on David's comment and I think one that deserves just as much attention is that M* blew this one badly. They reassured investors about SEQUX just like the Sequoia guys and Bill Ackman assured investors about Valeant. It's not uncommon to see this kind of stuff from M* related to both their fund and stock analyses. Mutual fund stars are clearly a reflection of history but the ratings (Gold, Silver, etc) are supposed to be forward looking. Stock stars and their moat rating are also supposed to be forward looking. No one is perfect in this business of course, but M* seems to frequently change their ratings in a far too reactionary way rather than a forward looking way.
At least as far as their stock ratings go it might be possible to assess whether they get it right more than they get it wrong if they were transparent about the results. In fact they were until sometime in 2013 when they wrote an article that extolled the importance of transparency, covered the results of their ratings and then from anything I can determine never wrote again about the performance of their ratings. I'm not aware that they're any better with their fund ratings. They report in a minimalistic way about their "batting average" with gold funds and how many end up in the top 25% of their category over various time periods in their Fund Investor newsletter but I haven't been able to find anything available even to premium website subscribers that shows what kind of returns or category rankings are achieved by their various ratings.
There's no question people screwed up at Valeant, Sequoia, Pershing Square and probably other places but I think David has it very right that M* screwed up too. My humble opinion is that it's not new and we'd all be wise to learn just as much from that as we should try to learn from what happened to others who've been criticized far more extensively for their poor decisions.
Calamos friend becomes CEO, gets rich package Yet more changes at Calamos. What's the plan, what's the business model? That "vision thing"--- can anyone make sense of what is happening at this shop?
http://www.chicagobusiness.com/article/20160315/NEWS01/160319909/calamos-investments-patriarch-gives-up-ceo-title
net income fell every year for the past five years, dropping to $21.4 million last year, or about a third of the $70.8 million it earned in 2014, and down from $137.9 million in 2011. Revenue fell 8 percent last year to $230.9 million, also declining for the fifth year in a row. [...] Calamos has suffered alongside public shareholders because a family affiliate owns 78 percent of the company, with just 22 percent of the economic interest traded publicly on the Nasdaq Stock Market.
Efforts to revamp the management team have made little difference. In 2013, Co-Chief Investment Officer Nick Calamos, a nephew of the founder, exited and was replaced by former Janus Capital CEO Gary Black, but he didn't last long. Black left the firm last fall.
Geez Louise!
Koudounis will earn an annual salary of $800,000, plus an annual bonus of $2.6 million, or more, depending on a determination by the board’s compensation committee, the company said in a filing with the Securities and Exchange Commission today. In addition, he will get annual “long term incentive awards” of $1.6 million. A one-time sign-on payment of $1.25 million will be payable next year
How reinvested dividends and cap gains amazed me today I happen to be looking at my holdings in my roth today at ML, and I saw something that seemed to make no sense to me at all until I broke it down. My utility fund FRUAX had a higher return than my biotech fund FBTIX , both bought in February 2013. I thought to myself, there is got to be something wrong here. I know biotechs have been in the dumper the last year, and especially the last 6 months, but how could a utility fund beat it? I went back and added up the dividends and cap gains over the three year period and Voila it was plain and simple. Quarterly dividends and regular cap gains reinvested turned a 20% three year gain on original shares bought into a 43% total return over three years. Then I remembered that over time 40% of the S + P gains are due to reinvested dividends and cap gains. Duuuhhhhhh. It may have been wise to sell my biotech fund when it peaked in July 2015, but who knew it would drop like a ton of bricks in less than one year? Its long term money, so just hope it finds its way back after the geo political issues become clearer. After all, we are all getting older and doubt if demand for new drugs will go down over time.
