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"I am also looking for a fund to invest $10K+ for 5yrs. For some one paying income tax at 30%, the return from a 5yr CD will be no more than about 3.75% p.a. On the other hand a number of Vanguard Tax-exempt bond funds seem to show at least 5% annualised return over 3 yr, 5yr and 10yr periods. Is there any reason for these funds to perform much worse over the next 5 yrs?
I would appreciate any information/explanation on this subject."

Take a look at Crosenfield's previous post (on the money market/bond fund thread), as well.

The problem is that the Net Asset Values (share prices) on bond funds, including tax exempt funds, are high, because of low interest rates, so the chances are in 5 years the NAVs will be lower. The annualized returns you are seeing reflect either NAVs higher than at the beginning of the time period you are looking at, or NAVs that were pretty close to where they are now at the beginning, which means the annualized returns are enhanced by the high current NAVs, or at least the annualized return reflects just the dividends. (Take a look at the "after tax" returns on Vanguard's web site: if the return after selling the shares is about the same, the NAV at beginning and end is about the same; if the return is lower from selling the shares, the NAV is currently higher; if the return is higher, the NAV is currently lower.)

If you buy now, you have to presume you'll have a capital loss on your $10,000 if you sell in 5 years. Alternatively, you can project what would happen if you buy a 5 year CD, then buy into the tax exempt fund if its NAV in 5 years is around its average. (What interest rates will be in 5 years is anybody's guess, but we know they are low now, so I prefer to make decisions based on the assumption they will be no less than average.)

If you look at the average durations of the intermediate tax exempt and long term tax exempt funds, or if you look at the average NAVs over the ups and down during the last 8 years, you have to assume somewhere around a 5% (intermediate) or 8% (long) capital loss, and be concerned that it could be considerably more if renewed deficit spending leads to even higher interest rates. Of course, we also won't know yields, but if yields turn out to be much higher than now, NAVs will also be lower, so the capital loss may be greater. Bottom line: if you subtract $500 or $800 from plausible compounded yields over 5 years, you'll be in the same ballpark in a 30% tax bracket as with a 5-year CD (paying taxes every year). But, with the added risk of the bond fund, same ballpark doesn't suffice.

I would be in the same boat, except I'm going to accelerate the home repair budget, so I'm looking at less money. What I think I'll do, if bond fund prices are still where they are in a few months, is do a CD ladder, 1, 2, 3, 4, 5 year CDs, then hope to have better opportunities to put at least some of the money into the bond fund as the CDs come due. Or I may just punt, buy 5-year CDs, and figure on putting new money into the bond fund when I can buy in at a decent price.
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