How To Build a Portfolio in Municipal Bonds On Your Own,
You can’t get up in the morning, flick a switch, take a shower, a subway, a bus, go over the bridge or under the river without a municipal bond touching your life. This country was built by bonds. Tax free Municipal bonds.
The trouble with municipal bonds is that a lot of people who belong in munis are afraid or confused by them. If that’s you, this course in building a portfolio of municipal bonds will teach you how to stand on your own two feet in the bond market -- whether you pick and choose the bonds for yourself, or a professional does it for you. Either way, you’ll be going into munis with your eyes open.
Let us begin: Who am I? And what is a municipal bond? I’m Jim Lebenthal, author of Lebenthal On Munis – Straight Talk About Tax Free Municipal Bonds For The Troubled Investor Deciding, “Yes…” or No!” (available at Amazon.com). I’m the guy who turned municipal bonds into household words and the Lebenthal family bond business into a landmark on the business skyline of New York City, wherever the Lebenthal radio and TV commercial were seen and heard.
WHAT IS A MUNICIPAL BOND?
If you come to a highlighted word, that could use more explanation, roll your cursor over it, click, and bring up answers to questions you may not even have thought to ask. For example, duration.
A municipal bond is evidence that a state, county, city, town, or other municipality or agency of the state needed money and borrowed it to dig roads, bore tunnels, build schools, put up hospitals, supply power, pave runways, and otherwise provide for the physical underpinnings for our quality of life. The bond is the municipality’s contract with its lenders to repay its debt on a definite date in the future, with a fixed rate of interest right along. There are $2.85 trillion ($2,850,000,000,000) of these IOUs outstanding. And almost three quarters of them are owned by individual investors, either directly or through funds and trusts.
Individual investors are the mainstay of the municipal bond market for two reasons. One is the heady appeal of tax-free interest in upper income tax brackets. The other is the reputation of our municipalities for paying their interest every six months on the dot and full face value at the end. Tax exemption and safety. They could be what’s beckoning you into further investigation now.
I wish I could say purpose is a third reason why investors love munis. What is the money being used for? But, let’s face it. Nobody buys munis out of their undying love for the hometown sewer system. Yet it is those necessities that we cannot live without – the roads and bridges, schools and subways, sewers and wastewater treatment plants – that imbue the bonds of our American cities and states with a pragmatic reason to make good and pay, besides just their legal, contractual obligation. Issuers are always building something and always coming back to you to borrow anew. Municipalities exist in perpetuity. They need their credit to survive and provide for the continuation of the community.
Unless issued as a taxable municipal bond, or as subject to the Alternative Minimum Tax (AMT), municipal bond interest is exempt from regular federal income tax. Most states also exempt their own bonds in the hands of their own taxpayers from state and local income taxes (their constitutional right to do so, while taxing out-of-state issues was recently questioned and upheld by the Supreme Court).
The words "safe," "safety," "guaranteed," only address creditworthiness, the assurance of receiving your interest right along and principal back at the end. If you sell before maturity, you may make money, you may lose money. It all depends whether interest rates are higher or lower than when you bought your bond, and on the fortunes of your particular issuer. Fluctuating resale values are simply a fact of life. Bonds go up. Bonds go down. But the history of municipal bonds of all types for paying their debts speaks for itself.
You're in for an education.