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Author: EBlakemore Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35367  
Subject: Re: EBlakemore Date: 5/12/2000 12:08 AM
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Matt,

I'm not trained as a financial planner, and in fact finding an advisor to double check my baseline assumptions on our investment, tax and estate planning (and whatever else comes up) is on my *things I should have done three years ago* list. <g>

I may be misreading your question so ask again if I miss the point, but I take it that these are 401ks or similar plans where you have a menu of choices, and those seem to be the only permissible choices? I guess my first step would be to grill the plan administrator and see if you can pressure them to give you the option of buying bonds directly within the plans. They may or may not have that flexibility. I know I've had trouble getting satisfying answers by way of my spouse, whose tax-deferred accounts are some of our major holdings outside of our home and various partnership interests.

One piece of advice I've heard from several planners I've auditioned so far, and seen over time in WSJ personal finance and other sources is to do much of your bond investing in taxable accounts, *especially* munis, if your present bracket makes them an attractive option. Some strategists seem to suggest that one should allocate nearly *all* of your tax deferred accounts to equities, to maximize the tax deferral benefits which are much stronger for stocks under most conditions than they are for bonds you buy and hold to maturity.

After all, with bonds you are only taxed on interest and, if you consistently buy your bonds above par, you can book an essentially meaningless loss at maturity. The effective yield to maturity tends to be the same, dollar for dollar, for an above par bond as it is for one sold below par. Unless I'm mistaken on the tax code, you should then be able to use such per "losses" to offset any capital gains you may be taxed on if you have a taxable stock portfolio in addition to your pension, 401ks and whatnot.

Since most munis are entirely tax free, if you limit yourself to issues in your home state, there is virtually *no* real benefit to holding these in a tax deferred account. Obviously I don't know enough about your finances as a whole to know how much of this may apply in your case.

Best to get a detailed answer from a credentialled planner on the details there. So far I only hold one muni, though my plan is to increase and ladder my muni holdings over the next year or two. Somewhere in there I'll probably also be looking at other parts of the bond market, especially if we see a strong decline and signs of a short-term bottom in bond prices soon.

Since I see lots of reasons that we *may* see further declines over the next year or more, I'm not exactly in a rush right now to load up on bonds, but the macro picture is so hazy right now that I should really be paying close attention for indications that rates are possibly peaking, at least for a few months. I may well be missing some exceptional short-term lows right now, in advance of the next generally-anticipated Fed rate hike.
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