Doing my best to avoid subject creep in this thread:

The original poster is a retired federal employee and he's looking to
invest for income. So a "tastes great vs. less filling" battle over
asset allocation is of little interest to him. He's at the stage in his
life where he wants somebody to send him a check every month and he's
looking for the most tax efficient way to accomplish that.

He should bear in mind that state tax rules for retirees may be
DIFFERENT from the rules for those in the workforce. The taxation of
Social Security and federal pensions varies from state to state, for
example. So it may be that these payments are worth more (or less) than
he thought they would be to him on an after tax basis. He should figure
this out first.

<Fedspeak ON> If he's still interested in an income oriented invested,
and he's a FERS retiree (vice a CSRS retiree) he should know that it's
possible to convert some or all of the money in his TSP account to an
annuity that pays him so much a month for life. The interest rate used
to convert the present value into a stream of payments varies from month
to month, but usually it's a pretty efficient way to purchase an
immediate annuity. See www.tsp.gov.<OFF
If after working through these issues the original poster is still
interested in munibonds I concur with those who have recommend he focus
on AFTER tax return. And that means he needs to calculate his "combined
marginal tax rate." If he doesn't know what that is, or how to calculate
it he should let us know and somebody will explain.

I also agree that unless he has hundreds of thousands of dollars to
invest in munis it's best to go with a bond fund, preferably a state
specific fund so that all the dividends will be double tax free. (Unless
he lives in a state with no or low state income tax, in which case one
of the big national munibond funds would be just fine.) There are also
"closed municipal bond funds." These are more complex and require more
study. But they can be a good option for some investors.

The original poster should NOTE WELL that the value of his principal
will FLUCTUATE in a bond fund. If interest rates go up, the value of his
principal will DECLINE. If he can tolerate that,great. But it's a
mistake to think of munibond funds are savings accounts with a higher
interest rate. I'm always amazed at the number of retired people that
invest for income who call the financial advice programs in a panic when
the value of their principal declines in a bond fund. Yes, I know it's
only a paper loss. But it still freaks them out. That tells me they were
clueless about the risks going in.

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FranksPlace2 <FranksPlace2[at]gmail.com> writes:

- quote -

That's a rather "cherry-picked" period. You're including
2003, for example, when the total stock market return was
31+%, but excluding 2002, 2001, 2000 - a period over which
the stock market lost almost 40% and during which had you
had some bonds, your losses would have been a lot smaller.

In the very long run, a balanced portfolio has, in the
past, made less than an all stock portfolio. But the
amount by which it's lowered one's volatility is quite
suprising.

A sample portfolio I ran recently, over 13 years, with
50% stocks and 50% short-term corporate bonds had this
surprising result - total return on the pure stock
portfolio averaged 11.13% with a standard deviation of
17.9%. (That's a *lot* of bouncing around).

The 50/50 portfolio averaged 8.83% with a standard
deviation of 9%. Yes, that's 2.3% less annual return,
but the worst down year (2002) had a loss of only 7.4%,
and the 2000-2002 period had the portfolio's total loss
over that period at less than 10% rather than the 40%
for the all-stock portfolio.

Even at 75/25, the avg ret is 10%, std dev 13.4%,
and the 00-02 downturn cost a cumulative 24%,
rather than 40%. Give up one tenth of the long
term annual return (10 vs. 11%) in exchange for
having 60% of the downside in the worst period.
That's a pretty interesting proposition, no?

(That was with a short-term corporate fund. With
a Lehman Index bond fund, the volatility dampening
is almost identical, but the hit on total returns
is actually *smaller* - long-term return on 50/50
goes to 9.33% with std dev at 9.24%.)

If you're sure you're ready to ride out potential 40%
losses (recovery from which requires a 66% return -
can you wait that long?), then by all means, go all stock.
But if you're not prepared to ride out losses of those
size, seriously consider a broader asset-class
diversification.

Most of the folks I know who really have the stomach
to ride out 40% drops without losing much sleep
have other sources of income (like pensions) on
which to rely (or have very little assets in the
first place, like kids just starting out).


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pixel_a_ted <pixel_a_ted[at]yahoo.com> writes:

- quote -

Minor nitpicking:
1) The value of an individual bond fluctuates, but if you sell
it, you are at the mercy of your broker-dealer again and
the transparency and bid-ask spreads for small scale bond
buy/sell transactions makes that an expensive proposition.
So if you buy individual bonds, do plan to hold them to
maturity.
2) When they mature, you do not necessarily "get all of your
investment back" but rather, you realize the yield to
maturity implied by the price you paid when you bought it.
If you bought them at par (ie. you paid $100 per $100 face
value), yes, you get all of your investment back. But if
you bought them at a premium, you do not - if you, say,
paid $110 per $100 face on a bond that matures in 10 years,
you only get $100 back at maturity (plus a coupon payment).
That extra $10 was, effectively, returned to you a little
at a time over the 10 years you held the bond (via higher
interest payments).

- quote -

I'd be pretty hesitant to bother with individual bonds
for a bond portfolio holding less than $100k. And if
it's meant to constitute a permanent part of the portfolio
(ie. one plans on *always* having at least a certain
percentage of bonds in the portfolio), then there's not
much reason to worry about the fact that a bond fund never
matures.

If you have specific future cash needs (ie. some large
purchase at a specific date), a selection of bonds which
mature on that date may make some sense, though if you
are talking about relatively short periods (ie. under 5
years), it's probably easiest to buy some CDs which mature
just when one needs it (and that way one also gets FDIC
protection).



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FranksPlace2 wrote:
- quote -

SPY in Jan 2000 - $145.75, today, $138.90
You can always find a bad period or good one to prove your point, but
that doesn't negate the fundamentals.
Joe

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On Jun 2, 7:23*am, FranksPlace2 <FranksPla...[at]gmail.com> wrote:
- quote -

Perhaps so, but that's a very "hindsight" way of going about things.
If we're playing by those rules, I am still be angry that I didn't bet
the entire nest egg on The Giants in Superbowl XLII.

5 years ago you had no way of knowing what the market was going to do.
Had it tanked, you might be belly-aching because you had so much
equity exposure and got burned. That's the very essence of a "balanced
portfolio". Returns are mitigated in both up and down markets. Like
Skip said, if you have a long enough time horizon to ignore
volatility, you may be able to get away with having little or no
bonds.

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"FranksPlace2" <FranksPlace2[at]gmail.com> wrote in message
news:2ddf4287-887e-4128-b882-7e925329923b[at]r66g2000hsg.googlegroups.com...

- quote -

Really? Why do you think so?

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On Mon, 2 Jun 2008 07:23:05 -0500, FranksPlace2
<FranksPlace2[at]gmail.com> wrote:

- quote -

I can understand why someone who wishes reduced volatility would
include bonds (today, short-term bonds.)

But for those of us long-term investors (horizon 10+ years) who don't
give a hoot about volatility, I say get back to me when Bank of
America is offering 10% on a six-month CD.


-HW "Skip" Weldon
Columbia, SC

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I hate bonds and especially bond funds. I am told I have to have them
"for a balanced portfolio" and "not to have short term money in the
market." But if I look at the opportunity cost (how much more money I
would have made if all my money was in stocks) over the past 5 years,
this is a very expensive proposition. And when we have a bumpy
market, as we have now, my bond funds have lost money in the last 12
months while my agressive portfolio is up 15%.

I am considering buying AAA laddered individual bonds. That will
reduce the sensitivity to interest rates. Fidelity has a pretty good
fixed income program.

Frank


On Jun 1, 6:07*am, BRH <B...[at]giganews.com> wrote:
- quote -

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On Jun 1, 7:07*am, BRH <B...[at]giganews.com> wrote:
- quote -

compared to stocks. For a stock, there is pretty much a standard price
at any given time that you can discover by going on the internet.
Also, there is a known commission to pay for buying or selling a
stock. The price of bonds is not as transparent and there may be no
commission to purchase them. That doesn't mean there is no cost. The
cost is built into the price that you pay for the bond and that in
turn determines the yield you get from the bond. Different brokers/
dealers could charge different prices, meaning you would get different
yields by buying the same bond from different dealers. The markup that
the dealer gets is generally not disclosed. It could be, say, 1/2%,
1%, 2% etc. Some brokerages that are not themselves dealers may charge
a (relatively small) commission which is in addition to the unknown
markup that you are paying the dealer that the brokerage is getting
the bond from. Other brokerages may have their own inventory of bonds
that they own. In that case, they are acting as dealers. Also, some
bonds have call features that you should be aware of.

There has been some advice to buy a bond mutual fund. That may be a
good idea, but you should realize that the value of the fund can go up
or down depending on the change in prevailing interest rates. If you
have an individual bond, its value also fluctuates but when it matures
you get all of your investment back. Bond funds never mature as there
are always new bonds being bought.

I am not trying to influence you one way or another, just trying to
point out some facts.

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Douglas Johnson wrote:

- quote -

It also depends on the state to a certain extent. If the OP is in a mid
to small state with a state income tax, there's probably not a low-cost
state muni fund available. If so then, then the state bite comes into
play. If in a no-income-tax state, or in one of the biggies like CA or
NY, then not a concern.

You also have to be careful of alternative minimum tax with munis. Some
are exempt from that, others aren't. Funds will normally include the
AMT exposure in the literature.




Brian

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BRH <BRH[at]giganews.com> wrote:

- quote -

The first thing to think about is your tax bracket. In the lower brackets, you
are likely to have more money at the end of the day with corporate or treasury
bonds than muni's. The issue is not how much taxes you pay, but how much you
have left after paying taxes.

- quote -

That's the rub. Individual muni bonds are hard to evaluate. Also, for
individuals, the bid-ask spreads can be high.

- quote -

Buy a muni bond fund if you decide you really want munis. Vanguard has some
first rate ones with low expense ratios. I'm sure there are others. Two things
to look for:

1) Low expense ratios. High costs will eat your returns.
2) Average duration. This one you will have decide for yourself. Short
duration funds will have little change in principle, but lower yields. Longer
durations will have more change in principle value, but higher yields.

-- Doug

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BRH <BRH[at]giganews.com> writes:

- quote -

Any of the big brokerage platforms (E-Trade, etc) should be set up to
let you buy bonds. But, why bother with individual bonds, as opposed
to a muni bond fund? I think individual small-potatoes investors are
always going to be at a disadvantage compared to big institutional
buyers in the bond market, both in terms of buying at the right price
and in research to evaluate the risks of various issues. Plus a bond
fund gives you more benefit of diversification than you could get from
buying a few individual bond issues on your own.

FWIW, I have the biggest chunk of my bond allocation in VMATX. Hard to
beat that 0.12% expense ratio.

-Sandra the cynic

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"BRH" <BRH[at]giganews.com> wrote in message
newsKqdnYXPC5J3md_VnZ2dnUVZ_ovinZ2d[at]comcast.com...

- quote -

If you buy a mutual fund that invests exclusively in municipal bonds, you
will avoid the hassles of managing individual bonds yourself, and you won't
have to evaluate the risk of individual bonds.

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Having recently retired, I'm now interested in converting some of my
non-IRA investments (ie - mutual funds) into something that will a)
provide some supplemental income on a regular basis (supplemental to my
monthly Federal pension) and b) minimize my taxes.

Therefore, I'm interested in purchasing some municipal bonds.

My questions are: a) What is the process for purchasing municipal bonds
- ie: where do I buy them (thru a broker? If so, how do I find a
broker), and b) How do I determine which bonds are the most "solid" (ie
- least risky)?

Any other thoughts on what to consider before purchasing, things to
avoid, and the best way to purchase muni bonds would be appreciated.

Thanks!

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