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muni bond fund vs. "core" bond funds

I've read suggestions now and then that it can make sense to hold muni bond funds in a taxable account and put higher-yielding stock investments in a tax-sheltered account instead. See, for instance:

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9163&pgid=wwhome1a One issue I haven't really seen addressed with this, though: is it really a bad idea to put *all* your bond allocation in a state-specific muni bond fund, instead of holding a more diversified "core" bond fund? How much state-specific risk is there, really?

I've been trying to imagine scenarios where something Really Bad happens to Massachusetts, that wouldn't also impact the rest of the US and the global economy as well. If terrorists nuke Boston, for instance, what happens to my MA muni bond fund is sure to be the least of my worries. :-P

-Sandra the cynic

Reply to
Sandra Loosemore
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It would depends on the state. In a big state with diversified bond issues such as California or New York, it shouldn't be a problem. If terrorists nuke Boston, your muni bond holdings would be the least of your worries.

Reply to
PeterL

In 1994 Orange County California declared bankrutcy because it invested in a hedge fund which had a sudden downturn that year. They eventually recovered, but are in trouble again due to gnerous pension labilities. San Diego is in much worse condition and has been considering bankruptcy.

Probaly a diversified portfolio or mutual fund would reduce risk.

Reply to
rick++

The specific bond fund I'm concerned with is VMATX. According to Morningstar, 64% of its holdings are AAA rated, the rest are AA and A. So, I'm not too worried about investment risk, just about the state-specific risk.

I'm 47 and in the 28% tax bracket. Being perhaps 15 years from retirement, I don't think I should be 100% in equities. What I'm trying to decide is, should I hold muni bonds in my taxable account, or a diversified "core" bond fund in my IRA/401(k) accounts, or some of both? (Currently, I'm in "some of both", just reconsidering what the best allocation might be for me.)

Yes, of course -- that's what I said when I mentioned the "terrorists nuke Boston" scenario. :-P "Boston declares bankruptcy" might be a more realistic concern, but I haven't heard anything that makes me think that's particularly likely, either.

-Sandra the cynic

Reply to
Sandra Loosemore

15 years from retirement is still a long time, but yes some bonds would be good for you. If you are going to hold bonds, then definitely hold the muni's in the taxable and the core bond in the tax qualified account.

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Reply to
CMJohnson

I might take this one step further if you are "eyeing" retirement in

15 years. How do you plan to withdraw and get more conservative.

If you think you will be selling assets (now or during retirement) as part of rebalancing or getting more conservative, then it makes sense for this piece to be inside 401k/IRA.

For example, if you think you could live off income from bonds, holding muni bonds outside of 401k/IRA makes sense.

If you plan to have 5% bonds now, but 10% bonds in 5 years... where will the "increased allocation" come from? If you could contribute enough to a taxable account (to buy more munis), then you could rebalance based on contributions... but even this has tax implications, because maybe you have to reduce 401k contributions to do this. If you would sell one asset to buy bonds to hit 10%, then it's clear to be you need a bond component inside 401k/IRA.

Where do you want to get, and then how will you get there?

Reply to
jIM

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