Many of my readers have diversified portfolios that contain investments in fixed income investments such as long-term Treasury bonds, individual municipal bonds, insured municipal bonds, and municipal bond funds. Personally, I have always maintained some of my portfolio in fixed income investments, including municipal bond investments.
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As I have indicated in many of my columns, I believe that, on a long-term basis, investors should maintain a significant portion of their diversified portfolio in equities. However, as I have indicated in many of my columns, long-term investors should not hold 100% of their portfolio in the stock market. I receive a great deal of mail from readers asking for advice regarding fixed income investing. Many of my readers have substantial income and as a result should consider investing some of their fixed income in municipal bonds.
Whenever I need advice regarding fixed income investing, I contact Hennion and Walsh, a company that has expertise in fixed income investing in general and specifically in individual municipal bonds. In June, they published an excellent article pointing out the advantages of purchasing insured municipal bonds titled “What Every Investor Should Know.” Their publications are available at no cost. You can contact them at : [email protected]. Their phone number is 800-836-8240.
Hennion and Walsh pointed out that investors who invest in individual municipal bonds can protect their investment and bond income by purchasing insured individual municipal bonds. The insurance provides protection regarding receiving your capital back when the bonds mature, as well as guaranteed income at the time bond interest is payable.
When interest rates increase, the market price of bonds falls. Bond insurance does not protect you from losses due to interest rate increases; the insurance protects you from losses due to the inability of the company that issued the bond to pay interest due as well as principal repayment at maturity.
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If the municipal bond issuer does not pay interest or principal when due, the insurer makes the payment as specified in the policy. The insurance is designed to ensure timely payments. Its main goal is to keep cash flow predictable, even if the issuer is under stress. It is not designed to make you instantly whole after a credit event. The insurer evaluates the bond, charges a premium, which is usually paid by the issuer at issuance.
The insurance guarantee covers:
—scheduled interest payments
—principal payment at maturity
—payments tied to certain redemption provisions.
My recommendation:
If you purchase individual municipal bonds issued by a company with a AAA bond rating, then you likely will not need to purchase an insured municipal bond. But if you purchase an individual municipal bond which does not have the highest rating because you are looking for a higher interest rate on the bond, then it makes more sense to purchase a bond that is insured. Hennion and Walsh will advise you regarding the pros and cons of different issues of individual municipal bonds, as well as the pros and cons of municipal bond funds as opposed to the purchase of individual municipal bonds.
Bottom line: Having a diversified portfolio with a significant percentage of equities in your portfolio makes sense. However, having a reasonable percentage of fixed income in your portfolio also makes sense. If your marginal tax bracket is high because of your high income, then you should consider investing in either individual municipal bonds, insured municipal bonds or municipal bond funds. If you are looking for sound impartial advice from experts regarding fixed income investing, I recommend you touch base with Hennion and Walsh.
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Elliot Raphaelson welcomes your questions and comments at [email protected].