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Author: folgore Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35387  
Subject: Risks w/ municipal bonds? Date: 5/19/2009 10:46 AM
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I'm new to bonds in general and municipal bonds in particular. I notice that munis are rated in a similar manner to corporate bonds. Given that they are issued by state and local governments, what's the real risk of default? Any recent examples of that? What's usually the worst case scenario? Premature call? Loss of principal?

It should be obvious I'm looking at those with high yields and less than AAA ratings. (A 9% tax-free yield is a market-beating return with a lot less hassle!)

Thanks in advance!
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Author: folgore Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27512 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 11:07 AM
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An additional question; I know some munis are insured. If a muni is insured, how can it still get a low rating?

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27513 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 11:34 AM
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<If a muni is insured, how can it still get a low rating? >

The insurers are dramatically undercapitalized relative to their muni books and also took on enormous losing derivatives risks that were outside their core muni insurance businesses.

In my opinion, the insurers do not deserve even the lowered ratings. They are in danger of defaulting if "higher than expected" numbers of insured muni bonds default.

I have been horrified by the over-leverage of the muni bond insurers since I became aware of them, in about 2005, long before the crisis.

Bottom line: if the insurer fails, the insurance fails.

Wendy

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27514 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 11:36 AM
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Wendy,
I'm looking for an alternative to CDs.
What do you think of GNMAs as opposed to Muni-bonds?

AM

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27517 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 2:22 PM
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Bottom line: if the insurer fails, the insurance fails.

Next line lower: if the insurer fails, the US government takes over.

:-(

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Author: folgore Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27518 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 2:54 PM
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Going back to munis, how often do states or cities default on their bonds? And what are the consequences? Any recent examples?

I know California is in a world of hurt financially, but have they actually defaulted on anything?

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27520 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 5:02 PM
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<What do you think of GNMAs as opposed to Muni-bonds?>

I have quite a bit invested in VFIIX and FGMNX. These yield over 4%, have no loads and low expenses.

Ginnie Mae bonds have no default risk. The fund's primary risk is if mortgage rates rise, so we will have to watch for that.

Wendy

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27521 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 5:05 PM
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<Next line lower: if the insurer fails, the US government takes over.>

So far, none of the monolines (muni bond insurers) qualify for US government takeover. I won't say it couldn't happen, but it would be a nightmare.

Wendy

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27522 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 5:07 PM
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I'm looking for an alternative to CDs.
What do you think of GNMAs as opposed to Muni-bonds?


Do you have $25,000 to plop down on GNMAs? Can you get GNMAs with a higher yield than top yields on CDs? Even if you can, do you want to lock in a low yield for a long time? I suspect new issue GNMAs will not have a lot of refinancing, because rates are so low. Refinancing is a problem for GNMAs when rates were relatively high when issued.

If you are in certain tax situations, you may find investment grade munis that pay higher than CDs of the same maturity, but definitely at higher risk. Remember, the idea isn't to have all kinds of different fixed-income/bond assets, but the get the best available return at any given time you have money to invest, adjusted for the level of risk you need to take to reach your financial goals. We may be in a very low interest rate environment, even relative to inflation, but the basic principle still holds.

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27524 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 5:10 PM
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Ginnie Mae bonds have no default risk. The fund's primary risk is if mortgage rates rise, so we will have to watch for that.

Keep an eye on the ten year, it correlates well with mortgage rates.

jack

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27525 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 5:25 PM
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Do you have $25,000 to plop down on GNMAs? Can you get GNMAs with a higher yield than top yields on CDs? Even if you can, do you want to lock in a low yield for a long time? I suspect new issue GNMAs will not have a lot of refinancing, because rates are so low. Refinancing is a problem for GNMAs when rates were relatively high when issued.

If you are in certain tax situations, you may find investment grade munis that pay higher than CDs of the same maturity, but definitely at higher risk. Remember, the idea isn't to have all kinds of different fixed-income/bond assets, but the get the best available return at any given time you have money to invest, adjusted for the level of risk you need to take to reach your financial goals. We may be in a very low interest rate environment, even relative to inflation, but the basic principle still holds.




First, my thanks to Wendy for her answer.

Then... yes I have $25,000+ to plop down on GNMAs. But I was thinking in terms of Vanguard's GNMA fund -- not the purchase of an individual GNMA bond. By investing in the fund I get the advantage of smarter heads than my own when it comes to bonds and I can leave the fund at any time it seems advantageous to me. My question was really how good GNMAs would be (right now) at replacing an investment in CDs (which have ceased to pay anything respectable) -- in my IRA.

For my taxable account, I'm considering municipal bonds. I already have a taxable bond fund in my taxable account (probably a mistake on my part - but that can be corrected if it seems the wise thing to do).

The big question (I guess for all of us who are seeking fairly safe income) is what are the best choices for the highest return balanced against the safest investment.

Vanguard's GNMA fund has a wonderful history of returns but I was not sure if it would be the best choice for replacement of the CDs that are beginning to dribble in (come due) in my portfolio. I don't want to purchase more CDs (tying up my money) at these ridiculously low rates.

So I'm thinking GNMA fund for my IRA
and
Municipal bonds for my taxable account.

Does anyone have better suggestions? If so, I would certainly like to hear them.

Thanks so much to you, too, Lokicious, for your reply. Much appreciated.

AM

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27526 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 5:30 PM
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Going back to munis, how often do states or cities default on their bonds? And what are the consequences? Any recent examples?

Bloomberg tends to be the keeper of such knowledge. If you really want to know about default rates of munis that would be the best source I can think of. S&P and Moody's probably have documentation as well.

IMHO, locals are getting squeezed and are more vulnerable than any time in recent memory. Fed and State unfunded mandates, regulatory changes put the locals in a bind. If they are sharp they have been calling as much debt as they can and refinancing it with lower rates. Which begs the wisdom question, if they really want to sell debt in this market, do we really want to buy it? Unlike the Fed they can't print their way out of the problem. They can roll old debt into new but for how long. Local organizations can put stop to taxes with very little financing and for that matter few numbers. A small cadre of letter to the editor writers and maybe one reasonably sized rally and momentum moves against fiscal wisdom. Not to mention the local election cycle.

California has hit a new kind of ugly. I think Cali is in the top 50 as a national economy, unfortunately Cali's progressives enjoy their spending. Not only that they have a long history of creating entitlement type programs that are not politically easy to remove once established. California's economy has long been volatile compared to many other states. When will the perfect storm hit Cali and hobble them from paying?

Was it less than a decade ago when Orange County defaulted? I think they took their insurer down with them.

Muni's are really a special breed of bonds. It takes a good understanding of their fiscal situation and the local culture to make an educated guess. I've watched Dem counties flop almost over night into Rep and vice-versa. I've watched letter campaigns create recall elections. Muni's cannot be analyzed simply as a going business like corporates can.

In short I wouldn't "bet" on a muni, I want to know I'm sitting on a winning ticket.

jack

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27528 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 6:10 PM
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AM,

Buying into any fund at or near its predictable peak is a good way to lose capital. Unlike like holding the individual asset your capital, in a fund, is not protected. If interest rates rise NAV value of your fund will fall, most likely faster than it can easily be recovered.

Best guess, and pick your vehicle, shorter is better than longer right now. Debt is bubble priced, the debt market is getting flooded by US Treasury, Wall St and munis. As soon as the stock market looks like it actually has legs you will almost be able to hear the WHOOOSH as money leaves bonds and seeks higher returns.

Having some cash on hand after the whoosh might be a pretty good place to be. YMMV

jack

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27529 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 6:56 PM
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AM,

Buying into any fund at or near its predictable peak is a good way to lose capital. Unlike like holding the individual asset your capital, in a fund, is not protected. If interest rates rise NAV value of your fund will fall, most likely faster than it can easily be recovered.

Best guess, and pick your vehicle, shorter is better than longer right now. Debt is bubble priced, the debt market is getting flooded by US Treasury, Wall St and munis. As soon as the stock market looks like it actually has legs you will almost be able to hear the WHOOOSH as money leaves bonds and seeks higher returns.

Having some cash on hand after the whoosh might be a pretty good place to be. YMMV

jack




I'm slightly confused here.
Are you saying that GNMAs are at their peak?
Or that munis are at their peak?

See...my problem is that the money market isn't paying even 1% these days. So it is foolish to put my money into them as the ones I'm holding come due.

I think it's also foolish at my age (retired) to put a large percentage of my portfolio into stocks.

I have eased back into stocks somewhat -- but the major portion of my portfolio has to go somewhere as these CDs mature.

What do you suggest?

And....not to worry - I have lots of cash on hand.
Also - I would be investing in Vanguard's funds - so I can cash out on any given day and into any other fund I feel like getting into. So while I could lose some, I also stand to gain as well.

Still interested in what you suggest I should do with all this money that is coming in from matured CDs. :)

AM

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27532 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 9:59 PM
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AM,

Good questions all.

What I am saying is that across most of the debt spectrum, CDs, MMA, MMF, bond funds, Treasuries and many Muni and Corporate bonds, debt is priced too high. Keep in mind interest rate, or return, is inversely related to price.

Low interest rates mean the sellers are getting more bang for their buck, that means as buyers we are getting less for ours. It is most easily seen in bonds which are actually priced above or below face value. It is in our best interests to buy cheap.

Lets say Widget Inc needs to raise 100k in capital and decides to sell some bonds, borrow some money. If they can sell at at par they will have to sell 100 bonds. If they have to sell at 50 they need to sell 200 bonds. If they can sell at 200 the only need to sell 50.

100 bonds at maturity = 100k
200 bonds at maturity = 200k
50 bonds at maturity = 50k

The example is extreme to get the point across. Higher "prices" is good for the seller/borrower, higher prices = lower interest rates. Lower prices are good for they buyer/loaner, lower prices = higher interest rates.

Currently interest rates are low across most of the debt spectrum. Good for borrowers, bad for loaners.

This leaves the fixed income seekers in a bind. The simplest answer is to stay relatively short on the maturity length. What this does is gives us a better chance at capturing better rates when the interest rates do rise. This also means that our near term returns are going to be poor. The good news is that longer term vehicles aren't dramatically outperforming near term vehicles.

Generally the debt market will unwind the longest maturities first. As either supply exceeds demand or demand dwindles below supply the long maturities interest rates rise first. As the cycle plays out earlier and earlier maturities interest rates rise.

My best advice is patience and prudence. Don't be in a rush to be "fully invested". Keep a weather eye on the economy and the business cycle. If the recession looks like it going to keep invested money in the debt markets we may have to invest more than we like at less than ideal rates. Even in these situations the markets get giddy and sometimes offer us a couple weeks or months of good shopping. You hear stock advisers talk about buying on the dips. I think debt investors need to think about adopting that strategy. Keep more cash than we would prefer earning a pittance in order to capture those better moments. What is the best balance of cash to keep available? I don't have a simple answer for that.

There is hope, many banks need to raise capital and this first sale only put a dent in most of their needs. There may come a time, particularly if they are in a rush to get out from under the TARP program, that these banks will offer above average rates.

jack

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Author: richinaz Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27533 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 10:44 PM
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Jack,

As a FYI...


I think Cali is in the top 50 as a national economy,


Actually it would be considered between 7th and 10th worldwide.

"According to the Bureau of Economic Analysis, California's gross state product is $1.727 trillion (2006 data, last updated Thursday, June 7, 2007)"

One site ranked it above Spain and just below Italy per 2006 stats.
http://www.lao.ca.gov/2006/cal_facts/2006_calfacts_econ.htm

California problems, if they grow, certainly will have some effect on the US as a whole.

Rich

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27534 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/19/2009 11:17 PM
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AM,

Good questions all.

What I am saying is that across most of the debt spectrum, CDs, MMA, MMF, bond funds, Treasuries and many Muni and Corporate bonds, debt is priced too high. Keep in mind interest rate, or return, is inversely related to price.

Low interest rates mean the sellers are getting more bang for their buck, that means as buyers we are getting less for ours. It is most easily seen in bonds which are actually priced above or below face value. It is in our best interests to buy cheap.

...and lots more




Thanks, Jack.
Appreciate the post.

AM

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27535 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/20/2009 8:04 AM
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What I am saying is that across most of the debt spectrum, CDs, MMA, MMF, bond funds, Treasuries and many Muni and Corporate bonds, debt is priced too high. Keep in mind interest rate, or return, is inversely related to price.

Low interest rates mean the sellers are getting more bang for their buck, that means as buyers we are getting less for ours. It is most easily seen in bonds which are actually priced above or below face value. It is in our best interests to buy cheap.


I really think it is confusing to talk about "price" or "value," rather than yield, especially when people are looking for alternatives for bank/CU CDs or money markets, where tradable value/price is irrelevant.

The point is that when yields on "safe" bonds (Treasuries, GNMAs) are low, the tradable value (price) of these is higher than when yields are higher. This means if interest rates on Treasuries or mortgages go up, the tradable value of any bonds bought when interest rates were lower will go down.

If you buy Treasuries or GNMAs (or CDs) on your own, the tradable value (price) s irrelevant if you hold to maturity. If you buy through a fund, the fund's NAV is based on tradable value, so you can't opt out by holding to maturity.

Vanguard's GNMA fund currently has an SEC yield of a little over 4%. The government is trying very, very hard to keep mortgage rates down (and Treasuries yields). But we have to assume they will go up sooner or later. That means you have to expect that fund to sustain a loss to its NAV of between 5% and 20% if mortgage rates go back to something like a typical interest rate cycle (more if we get into something like the 70s and 80s).

If you stick with CDs, you may get a slightly lower yield now, especially if you need liquidity and do an instant ladder (something closer to 3% average yield instead of 4% for a Pen Fed 5 year CD). But remember with CDs, presuming you buy with a small penalty clause not a brokered CD, you can get out cheaply if inflation and interest rates take off.

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27537 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/20/2009 9:10 AM
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Rich,

Top ten was what was in my head but with out looking it up I didn't want to type it. Thanks for digging that up.

California problems, if they grow, certainly will have some effect on the US as a whole.

The flip side is Cali is capable of growing its economy to the point it grows out of its current dilemma. One of their governance issues has always been their generosity at the top, while seeming to forget that tights years are in their near future. As I stated before Cali's economy tends to be more volatile than many other States. When they are up they are golden when they are down it gets ugly in a hurry.

jack

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27538 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/20/2009 9:32 AM
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Loki,

If you stick with CDs, you may get a slightly lower yield now, especially if you need liquidity and do an instant ladder (something closer to 3% average yield instead of 4% for a Pen Fed 5 year CD). But remember with CDs, presuming you buy with a small penalty clause not a brokered CD, you can get out cheaply if inflation and interest rates take off.

I agree

really think it is confusing to talk about "price" or "value," rather than yield, especially when people are looking for alternatives for bank/CU CDs or money markets, where tradable value/price is irrelevant.

I disagree. Tradable price matters at purchase whether it is priced in yield or a percentage of face value. Paying too much for anything is rarely a good idea. The only way we can shop smart is if we can find a balance between our needs, current price and expected value. Buying bananas at $.39/lbs is better than buying bananas at $.99/lbs.

When I was growing up we use to make an annual summer trip to visit friends in the Yakima valley of Washington. The added bonus was we always went during peach harvest season and with our friends connections we got great peaches at great prices. The next week was canning week so we could have good peaches all year. How much we saved depends on how you want to price the trip. If you exclude the travel costs because we went to visit friends we got a bargain. If you don't, I suspect we broke even with the grocery stores but got better peaches. Neither method of calculating price/lbs would be wrong.

How we figure price and value matters to our investing decisions. If we personally place a premium on safety of assets then we are willing to pay premium to capture that safety. This means for the same price two different shoppers could have two different values; one believes its a fair price, the other believes its over priced. Neither of them are wrong.

I think there is a danger in keeping things too simple. Understanding the basics of the market you are shopping gives you bargaining power. We don't all need to become debt analysts but not understanding the basics places us at a disadvantage. How much are bananas usually? If we know that we can make a judgment when we shop whether to get bananas this week or not. Knowing if another store is selling them cheaper is a useful piece of data. Maybe if we are at that end of town for other reasons it would be worth swinging in and picking up a bunch. We don't need to know the whole banana business to make these decision.

Price, Yield, Value are all terms we, as investors, need to make peace with.

jack

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27539 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/20/2009 10:05 AM
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Price, Yield, Value are all terms we, as investors, need to make peace with.

This is a teaching issue. If someone is starting from the idea of seeking alternatives to rolling over a CD, they are thinking about getting a better yield. So in teaching, we should start with yield, then explain how yield on tradable bonds is determined by price not just coupon and, in the case of funds, that the value of bonds not current yield is crucial to understand.

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27540 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/20/2009 10:24 AM
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Price, Yield, Value are all terms we, as investors, need to make peace with.

This is a teaching issue. If someone is starting from the idea of seeking alternatives to rolling over a CD, they are thinking about getting a better yield. So in teaching, we should start with yield, then explain how yield on tradable bonds is determined by price not just coupon and, in the case of funds, that the value of bonds not current yield is crucial to understand.

-------------------


Yep. This is all really interesting. Seriously.
But the fact remains that I (and probably lots of others) have CDs paying 3 and 4% coming due and our choices are limited.

I know nothing about the purchase of individual bonds and so will not ever be buying them.

My choices are Vanguard's money market (currently paying less than 1/2 of 1%) and Vanguard's taxable bonds (for my IRA) and Vanguard's tax exempt bonds (for my taxable account).

I don't have the luxury of waiting around till some opportune time in the future to buy into these funds at the exact moment of best value. Waiting, I'm losing income. Leaving everything in the money market is ridiculous at less than 1/2 of 1% -- and to plunge into individual stocks is pure insanity with the market in such flux.

The history of Vanguard's GNMA fund is impressive -- I don't think I've seen another fund with such a winning record.

It was encouraging that Wendy said she was holding quite a bit in GNMAs.

The holding period on Vanguard's GNMA fund is interesting, too. It seems rather short to me -- and they are not holding very many bonds if their website research results are to be believed. So it seems to me that if some mortgages are paid off through re-financing, Vanguard will be adding new ones at various rates. If rates go up, Vanguard will add those higher mortgages to the fund as well. Is my thinking totally screwed up on this?

In any event -- I just don't see what other choices I have.
Unless, of course, I want to buy yet more CDs at ridiculously low interest rates (AND tie up my money once again for long periods of time) -- which I do not want to do since I expect the stock market to recover at some point and I want to have those funds available immediately.

I do buy brokered CDs through my brokerage account with Vanguard. (Someone mentioned brokered CDs earlier.)

By keeping everything at Vanguard I simplify my life -- and, believe me, that is worth something. :)

AM

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27543 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/20/2009 12:42 PM
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This is a teaching issue.

Agreed, and our students for the most part are very capable and self motivated. Keeping it too simple is a significant mistake on the part of the teacher(s). This isn't a top down teaching model, it is flat, very flat. In that atmosphere the student is expected and encouraged to ask for clarification if they run across a term or concept they don't readily understand.

Yield chasing without understanding can lead to significant mistakes. One needs to grasp relative value in order to make sense of price/coupon/duration/yield. 4% looks good compared to 3% or 2.5% only within the context of the current situation. Markets move, change and hopefully normalize. 4% in a 5+ year vehicle today may look like a reasonable choice but next year or 3 years from now it may look like a very poor decision. The only way to sort this out is to have an understanding of value. What is overpriced? What is a bargain? Simply put, in our house if meat is overpriced we eat beans and rice.

Folks need to make intelligent informed decisions and that takes data and a way to interpret that data. Is sitting in a MMA earning diddly squat worth it in order to capture manic moments in the market or having the liquidity to DCA into a rising interest rate market? Each of us must answer that question to our own satisfaction.

We don't need to be macro economic gurus to make good decisions. We don't need to be corporate financial sheet sleuths to make good decisions. We do need to be able to sort out overpriced vs underpriced. Yield on its own is not a sufficient tool. Thermometers measure heat but tell us nothing about humidity unless we pair it with another that has a moistened cotton ball and sling it around. Humidity tells us little about barometric pressure. If we have all three tools we can make an informed decision about whether or not to re-roof the house this weekend or not.

Yield out of context is nothing but single data point, it has no relative value.

jack

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27544 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/20/2009 1:11 PM
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AM,

By keeping everything at Vanguard I simplify my life -- and, believe me, that is worth something. :)

I do much the same and fully agree it does make life simpler. It also occasionally keeps out of something I would like to get into. Pro and Cons.

It was encouraging that Wendy said she was holding quite a bit in GNMAs.

Wendy got in at a different time for her personal reasons. It may have been a good decision at that time, it may not be a good decision today.

I don't have the luxury of waiting around till some opportune time in the future to buy into these funds at the exact moment of best value. Waiting, I'm losing income. Leaving everything in the money market is ridiculous at less than 1/2 of 1% -- and to plunge into individual stocks is pure insanity with the market in such flux.

Do you have the luxury of missing out on better opportunities down the road? Do you have the luxury of losing a potentially significant portion of your investing capital? I'm not suggesting that we seek precision. Precision in market timing is an accident. I am suggesting that there are bad choices that need to be avoided even though we feel like we are currently in a bind. All bond funds will take a severe beating if interest rates go north with legs to run. This will leave you with less capital to earn with. Preserving capital may be a more important strategy in the short term than we experience during more normal economic and market times.

I disagree with your plunging into individual stocks comment. Now may be a good time to pick off a few fruits hanging on low branches. I prefer to be on the bus before it starts moving. YMMV

Patience and prudence. Rash choices made because we feel pressured to be fully invested can lead to unpleasant consequences. A few years back the market punished Boeing for not inking as many deals as their rival Airbus. The CEO's comment was "We will not chase bad deals just to make deals"; a good piece of advice. Most of us are frustrated by our current fixed income options. MMA/MMF returns stink, Treasuries stink, CD rates stink, corporates take a fair amount of leg work and as a whole their returns are not eye-popping either. IMHO the majority of the debt market is bubble priced. Is that where you want to be when the bubble pops?

To address your specifics. How long would you anticipate using a GNMA fund as a MMA proxy? What would be the anticipated return over that holding period? What risks are you accepting in order to capture that return? Is the risk reward worth it? A few years ago Kodak had a dividend yield in the 10% range. Everyone knew it couldn't last but I know more than one that decided to use Kodak as a yield instrument. That worked just great until Kodak announced a huge cute in the dividend which trashed the stock price. A bunch of people lost a sizable chunk of change chasing that yield.

Weigh your options carefully. Discern need versus want.

jack

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27548 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/20/2009 1:57 PM
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Weigh your options carefully. Discern need versus want.

jack

------------------


Argh.
Sounds like you are suggesting I keep hundreds of thousands of dollars in a money market at less than 1/2 of 1%.

What, exactly, would stop me from bailing on the GNMA fund any day it struck my fancy to do so? Or any bond fund, for that matter. On any given day I can be out of bonds and into stocks with a few clicks of my mouse button.

I guess I don't see the hysteria (or the tremendous losses) you seem to be alluding to. If the bond market heads south, I'll get out of it. How much can I lose in a bond fun in a single day or week? Do you think the bond market is really that unsafe?

I have to admit I'm very confused to the point of being paralyzed -- and watching my uncommitted hundreds of thousands languish in a money market. Somehow that just seems stupid to me.

I have, by the way, already admitted to easing back into stocks. But at my age (retired) I never want the stock portion of my portfolio to be the major part of my holdings. If people didn't learn a lesson from 1999/2000/2001 and 2008 then they will never understand that thinking. I, however, am a pretty quick study.

I lost more than I can to admit during that bubble-burst in 2000 -- so before the 2008 crash I was mostly out. AngelSpouse was completely out months before it crashed -- so between us we lost practically nothing this time around.

I know I need some stocks for growth -- but I don't want the exposure to be a major one...just in case the market takes yet another nosedive. I'd like to keep what I've worked so hard to get and husbanded through thick and thin for years now.

So when do you expect this bond market nosedive? And how much income will I be giving up to wait for it by remaining in a money market paying nothing? Would it really be a mistake to get what yield I can from a couple of bond funds? There has to be an alternative to .4X % (other than stocks). What do you suggest?

AM, running in a circle...

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27551 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/20/2009 5:08 PM
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AM,

Sounds like you are suggesting I keep hundreds of thousands of dollars in a money market at less than 1/2 of 1%.

I don't mean to be absolute in suggesting this. I want you to be aware of your options and current conditions. I want you to be aware of the risks before you step out. I don't know how closely you monitor your positions and trades.

What, exactly, would stop me from bailing on the GNMA fund any day it struck my fancy to do so? Or any bond fund, for that matter. On any given day I can be out of bonds and into stocks with a few clicks of my mouse button.

There is nothing keeping you from doing this. The idea, in of itself, is not a horrible one as long as you are going in with eyes open. ETFs make better vehicles for this kind of approach. More traditional funds occasionally have weird restrictions to keep people from trading them.

Do you think the bond market is really that unsafe?

In the past the bond market tends to unwind relatively slowly. This time there is unprecedented money stashed in bonds and other debt. I don't know how fast it will move. Which is why I suggested you back of napkin how long you think you may be in these funds. If you don't plan on being in them vary long your benefit would be pretty limited.

jack

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27552 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/20/2009 5:17 PM
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Sounds like you are suggesting I keep hundreds of thousands of dollars in a money market at less than 1/2 of 1%.

I'm not suggesting this, and I'm not sure Jack is.

But if you want to choose low default risk options (Treasuries, TIPS Insured CDs, maybe GNAs), you will get low yields, especially in the current market. (Thanks to having been laddering for years, I am still averaging about 5%.)

But if you are hung up on the convenience of one stop shopping, as good as Vanguard is, you will have to accept lower returns than you can get if you combine Vanguard with a couple of banks or credit unions (notably Pen Fed) that tend to provide higher returns than brokered-CDs through Vanguard (although sometimes those have better yields). Especially right now, having the possibility of getting out for 2% on a CD is appealing, in case inflation takes off. You can't do that with brokered-CDs.

If you do want to stick to Vanguard, I guess I would just ladder brokered-CDs. You can probably average 3% and have good liquidity for next 5 years to rollover maturing CDs if yields go up. No guarantee 3% will beat GNMA over next 5 years, but if these absurdly low interests rates on high quality mortgages do go up even 1% point, you'll do about as well with a CD ladder.

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27553 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/20/2009 5:36 PM
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AM,

Sounds like you are suggesting I keep hundreds of thousands of dollars in a money market at less than 1/2 of 1%.

I don't mean to be absolute in suggesting this. I want you to be aware of your options and current conditions. I want you to be aware of the risks before you step out. I don't know how closely you monitor your positions and trades.

What, exactly, would stop me from bailing on the GNMA fund any day it struck my fancy to do so? Or any bond fund, for that matter. On any given day I can be out of bonds and into stocks with a few clicks of my mouse button.

There is nothing keeping you from doing this. The idea, in of itself, is not a horrible one as long as you are going in with eyes open. ETFs make better vehicles for this kind of approach. More traditional funds occasionally have weird restrictions to keep people from trading them.

Do you think the bond market is really that unsafe?

In the past the bond market tends to unwind relatively slowly. This time there is unprecedented money stashed in bonds and other debt. I don't know how fast it will move. Which is why I suggested you back of napkin how long you think you may be in these funds. If you don't plan on being in them vary long your benefit would be pretty limited.

jack




Thanks, Jack.
I can't say this helps me know what to do right now though.
I feel like I'm between a rock and a hard place with this.
There has to be someplace to put all that money.
Maybe I'll just wait a while... but I surely do feel pretty foolish (little 'f') letting it sit in the money market.
O well...
Thanks just the same.
I think on it some more.

AM

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27554 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/20/2009 5:38 PM
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Thanks to you, too, Loki.
I think it's time to back up and huddle before the punt. :)

AM

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27557 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/20/2009 8:06 PM
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AM,

We all feel for you, it is a very frustrating time to put money to work in fixed income.

I feel like I'm between a rock and a hard place with this.

No you are not. Cash never hurts as you and your spouse found out when the stock market got funky. You are in a much better place than many, you have options. You could put 25% - 50% in the GNMA and 25% in a CD ladder and MMA the rest or any reasonable combination. This is a good place to be. The returns are less than desirable but you aren't stuck.

I apologize if I came on too hard. I really worry about people rushing out of the bad and into the next bad. It happens way to often. You mentioned the 99 00 blow up. How many people where still putting their money in funds and stocks even past the tipping point? When they finally realized they were taking a beating they ran to overpriced bond funds thinking they were safe. Their price point into bond funds was bad and they ended up losing again. It was like getting punished for doing what your coach told you to do. Many walked away feeling like they couldn't beat the system. Unfortunately they didn't understand the markets they were investing in and/or didn't understand the value/price concept.

Maybe I'll just wait a while... but I surely do feel pretty foolish (little 'f') letting it sit in the money market.

Sometimes the best decision is to wait for a better time to make a decision. As weird as it sounds choosing not to decide is an active choice, as opposed to be frozen by fear or confusion.

jack

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Author: richinaz Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27558 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/20/2009 8:40 PM
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AM,

I guess you have to ponder whether getting around 4-5% from a GNMA fund vs. getting 2.5-4% from a CD is worth the additional risk. The CD is insured and some (all?) you can withdraw money from early with minimum penalties. If inflation goes up a bit it certainly is possible that you could lose a few percent from your GNMA fund before you could sell it, especially since Vanguard (and most mutual funds) only allows you to sell the fund at the closing day's price (unlike stocks or ETFs).

Some might recommend dividend paying stocks but the way things have gone there isn't any guarantee those wouldn't drop 10-20% in the near future.

About the only good news is that inflation has been negligible so anything you are making should allow you to tread water.

BTW, good job at avoiding the recent stock losses. Wish I could say the same.

Rich

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27559 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/20/2009 9:02 PM
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I think it's time to back up and huddle before the punt.

What you need to do is start by figuring out how much of a return over inflation you need to get over the long haul from your bonds/fixed-income assets. If you can live with 2-3% above inflation, then sticking with CD laddering is probably the best choice, even if it may come in lower for the time being. If you need 5% above inflation, you will need to take on more default risk.

The problem with GNMAs have been they have not provided more than CDs. They generally beat 5-10 year Treasuries by about 1% point, but so do CDs, unless you pay high California taxes or something like that. Unfortunately, most of the talking heads who push bonds (except this board which has a history of neutrality) don't like to talk about CDs or credit unions, or anything that doesn't make money for Wall Street (and the media that makes money from Wall Street ads). But at least since I've been paying attention, which is nearly 10 years, if you are selective finding the better yielding CDs, you can get as good yields as from GNMAs or legitimate AA-AAA corporates (not counting AA and AAA that have deservedly been traded into junk or near junk). It is only when you get down to lower investment grade corporates or junk bonds (or are willing to go for very long maturities with pretty low yields) that corporates provide better yields than the best CDs. What you have with the GNMA fund right now is a yield just slightly better than CDs. And most of the time over the last 10 years, it has been even or worse.

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27560 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/21/2009 12:14 AM
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Sounds like you are suggesting I keep hundreds of thousands of dollars in a money market at less than 1/2 of 1%.

I just checked my MM fund, FMOXX. Oy Vey, it's yielding a paltry 0.16% right now.

Any suggestions for a better MMF in my Fidelity brokerage account???? Help!

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27561 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/21/2009 12:19 AM
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AM,

We all feel for you, it is a very frustrating time to put money to work in fixed income.

I feel like I'm between a rock and a hard place with this.

No you are not. Cash never hurts as you and your spouse found out when the stock market got funky. You are in a much better place than many, you have options. You could put 25% - 50% in the GNMA and 25% in a CD ladder and MMA the rest or any reasonable combination. This is a good place to be. The returns are less than desirable but you aren't stuck.

I apologize if I came on too hard.



Oh, not to worry -- you were just giving your best opinion.
And you are right about it being frustrating. This market is a little crazy and I'm pretty UN-sure what to do right now.

I've already gotten back into 4 funds (one of them is a bond fund) - and all are currently paying off for me. But my entrance back into the market has been kind of a tippy-toe into cold water move. I don't feel confident enough to plunge into the deep end just yet.

The problem is that it just kills me seeing that money sitting there day after day earning less than a half percent. Still you are right- at least I still HAVE the money. :)

And something else you said gave me pause as well. I will look into ETFs for some of what I will need in my portfolio. This "cooling off" period I'll be taking will give me the chance to take a closer look at some of these as well as the bond funds I've been considering.

So I really do appreciate the time you have taken to answer my questions -- even though I've seemed like the headless chicken running around in circles. So I'd just like to thank you once again. And Loki as well.

AM

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27562 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/21/2009 12:24 AM
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BTW, good job at avoiding the recent stock losses. Wish I could say the same.

Rich

--------------------------


Thanks. I think losing all that money back in 2000 put the fear of the market-demons in me. :)

As I said, I lost a little bit because I continued to hold some of my funds from May through July and into August and September of last year.
In July I began unloading them -- and on October 6th I unloaded the last fund I was clinging to like an old-friend teddy bear. :) On that date I was 100% cash. I stayed in cash and CDs until mid-March of this year when I began getting back into the market. So I've made up some of my losses - but not all of them.

Very sorry to hear that you had losses recently.
It's been a confusing (and rather shocking) market.

AM

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27565 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/21/2009 10:04 AM
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AM,

The problem is that it just kills me seeing that money sitting there day after day earning less than a half percent.

Being "fully invested" despite all the council from the wise and many Fools isn't always in our best interest. It is always in the brokerage industries best interest. (Anyone else see the dilemma?) Of course if you attempt to make a rational argument with a dyed in the wool believer they will accuse you of market timing, label you as a "trader" and then feel validated in ignoring you.

We have all been inundated with the advice to remain fully invested. The advice sneaks in even when we aren't paying attention. To quote Frodo "It would seem like wisdom but for the warning in my heart".

This "cooling off" period I'll be taking will give me the chance to take a closer look at some of these as well as the bond funds I've been considering.

This seems like true wisdom to me. Take the time to make a plan, so you have a plan to follow when the market or personal sentiment changes.

jack

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27567 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/21/2009 10:17 AM
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AM,

The problem is that it just kills me seeing that money sitting there day after day earning less than a half percent.

Being "fully invested" despite all the council from the wise and many Fools isn't always in our best interest.

------------------


Actually, I'm never FULLY invested.
I always keep enough to live for 3 or 4 years in cash. Just in case. :)

AM

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27570 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/21/2009 11:24 AM
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AM,

Actually, I'm never FULLY invested.
I always keep enough to live for 3 or 4 years in cash. Just in case. :)


You da bomb. Way to go.

I know it is easier said then done; stop fretting you are sitting pretty.

jack

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27571 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/21/2009 11:27 AM
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AM,

Actually, I'm never FULLY invested.
I always keep enough to live for 3 or 4 years in cash. Just in case. :)

You da bomb. Way to go.

I know it is easier said then done; stop fretting you are sitting pretty.

jack

------------------------


Thanks, Jack.
You made me smile today. :)
And the sun is shining and the view from my windows is beautiful.
I guess I'm doing ok.

AM

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Author: bluepost22 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27574 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/21/2009 12:52 PM
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VFIIX and FGMNX are near all time NAV highs going back to 1987. VFIIX seems to have traded in a range between 10 and 10.50 for most of the time since 1992. FGMNX has a larger range than VFIIX. Every time I do the math I get the same answer: bond funds spend most of their lives fluctuating +- 5% around a slowly moving "mean", with max excursions being +- 10%.

I would love to get the 4.69% quoted yield but after 2008 I can't stand the idea of losing even 5% of my principal. So I'm going to farm out to 6-12 month CD's until the dust settles.

Ideally I could be in muni's because the default rate has historically been so low but I agree with the other posters that these are new times and, unfortunately, I live in the dumbest state in the union, California.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27575 of 35387
Subject: Re: Risks w/ municipal bonds? Date: 5/21/2009 1:27 PM
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I always keep enough to live for 3 or 4 years in cash. Just in case.

With laddering and intelligent use of CDs or alternatives (TIPS, etc.), you can have 3-5 years cash and good liquidity for expenses (not to be confused with market timing) and usually get better yields than with a money market.

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