We have all been told that municipal bonds might not be flashy, but they are safe. Now, however, that advice might no longer hold says Michael Dean from the company office where he offers QROPs advice. Defaults are on the rise.
You have heard this litany so many times you could repeat it by rote: “If you want a safe investment, get a municipal bond. Sure it will not make you rich. It is not even designed to do that. But it will give you a dependable income (interest) and your money will be secured.” Those sellilng points might sound good in theory, but what exactly are the facts.
Municipal Bonds are Safe Until They are Not
Well, the title of May 28, 2010 CNN article by Sara Behunek “Three American cities on the brink of broke” might sound foreboding, but this piece does offer some reassurances. It notes that the average five-year cumulative rate for investment-grade municipal bonds is less than half a percent. That figure represents about one-third the comparable figure for corporate debt.
The message these figures parlay is obvious: Sometimes, you just have to do the best you can do and not let yourself be “paralyzed” by the “hazards” which surround an investment, be it munis or anything else for that matter, because there are no “perfect” investments in the same way there are no perfect anything else. Unless you accept that essential reality, you might not make purchase that will turn out to be a good mix for your portfolio.
And there are factors other than their relative safety which might make municipal bonds, often called “munis,” appealing. They are tax advantaged; depending upon the specifics you might not have to pay either state or federal taxes on the interest you receive. This bolsters their effective rate of return.
Another major bonus for munis: Investors can put their money in a bond issue which funds projects that directly benefit the community where they live, according to a July 29, 2010 dailymarkets.com article by Martin Hutchinson “Municipal Bonds Not As Safe As Brokers Say They Are.”
However, the water in this glass might be too murky to call it either half empty or half full. The … Read Full Article