FINANCIAL MANAGEMENT
personal wealth health

Attain Steady Gains

Consider the role of bonds in your investment portfolio.

WILLIAM J. LYNOTT

Many investors, especially those at or near retirement, hope to preserve their principal while generating a predictable flow of income to cover living expenses, college expenses or other long-term financial obligations.

Given the volatile and unpredictable nature of today’s equities markets, taxable and tax-free bonds can be a major help in achieving that objective while helping to smooth out the bumpy ride in the equities markets.

Tax-free municipal bonds

Regardless of your present tax bracket, chances are that municipals can help to strengthen your financial position. It’s impractical to include municipals in a tax-exempt retirement account such as a 401(k) or an IRA. However, if you’re building a retirement nest egg in a taxable portfolio, municipals can make a lot of sense.

Conversely, if you’re saving for a child’s college education, a municipal bond portfolio makes it possible for that money to grow without incurring a tax obligation.

The yields on tax-exempt municipals are usually lower than on taxable corporate bonds, so invest in tax-exempt securities only if your particular circumstances allow you to save more in taxes than the additional amount you would earn from higher-yielding taxable investments.

Mutual funds

Building a solid portfolio of individually selected municipal bonds could prove to be a tough challenge for the typical small investor. That’s why mutual funds make as much sense for bond investments as for stock investments. Almost every major mutual fund family offers a wide range of bond funds limited to individual states and a fixed range of maturities. Look for the funds that charge the lowest management fees and invest solely in “munis” from your own state, thus giving them tax-free status for both federal and state.

In addition to their ease of diversification, bond funds have the advantage of liquidity. Some individual municipals are thinly traded, so you could take a loss if you sell before the bond’s maturity.

Taxable corporate bonds

Except for tax considerations, investments in taxable corporate bonds carry much the same advantages and risks as municipals. When you buy any type of bond, you’re lending your money to the issuer in exchange for a fixed rate of interest. If you hold the bond to maturity, you will receive the face value on redemption.

In the eyes of some investors, municipals are more attractive than corporates because municipals are usually rated higher by the major credit agencies, meaning default is less likely. However, investments in bonds are not entirely risk free — though rare, default is a possibility.

Investing

How much of your personal investment portfolio should be dedicated to municipal bonds depends on variables such as your tax bracket, tolerance for risk and age.

Whatever your circumstances, corporate and tax-free municipal bonds offer you an opportunity to balance your portfolio to suit your individual needs. OM

Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an accountant or tax advisor for advice regarding your particular situation.

MR. LYNOTT IS A FREELANCE WRITER WHO SPECIALIZES IN BUSINESS MANAGEMENT AS WELL AS PERSONAL AND BUSINESS FINANCE. VISIT WWW.BLYNOTT.COM, OR SEND COMMENTS TO OPTOMETRICMANAGEMENT@GMAIL.COM.