MUNIs

A mutual fund gives you diversification. Are you able to diversify buying individual bonds?

Is now the best time? Who knows. From what I am reading the credit crunch is impacting the muni market negatively.

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It is possible to find credit ratings for various States, without a great deal of difficulty, by searching the internet. The site I found included the revenues (e.g. tax base) backing the bond issues, and some demographics. It is also possible to check the total outstanding issues, interest payments, and times interest covered (I believe current criteria is that it should be 3-4 times or better) by narrowing down to individual counties (on their web sites). It is critical to look at these numbers.

I jotted down some states with high ratings (this isn't a complete list, just an indication - Georgia, Utah, South Carolina, Maryland, Missouri, Ohio, Texas). Once you have good States, if you want to go one level down from General Obligation Bonds (GOBs), you must look at the counties and issues outstanding (or new issues planned), and understand the source of revenues, be that taxes or projects. The county takes responsibility for some issues, but not for others. My personal advice is to avoid anything not the responsibility of the county itself.

As to timing - there is an on-going liquidity crisis in municipal issues, and rates have been driven higher. My guess is that you aware of this, and thus your timely question. Availability of issues is also a problem. A solution is to do some research in advance, so that you have a list of 10 issues you would be willing to accept, then ask your broker/ dealer if those bonds are available. You may also ask them to keep watch for them, and talk to the bond desk and find out when these may become available, how liquid they are, etc..

If there is a bond available that sounds like it might be good, then you can research it before buying. You want to see the revenue base and the times interest covered. If it is a GOB of a State you will accept, then the specific issue may not matter at all - since all are backed by the State's tax base - all that matters then is the maturity and rate.

(Just a note on issues the county is not responsible for. Do not accept "Oh, it's a hospital revenue bond rated AA, and the yield is higher." A hospital revenue bond is as far as I have seen, not the responsibility of the county listed, AND may indeed fund projects in other states, AND the revenue and payments streams may require some in- depth and specific research, AND the rating may not be on the issuer at all, but simply a rating on the bank that issued the letter of credit!)

I've tried to address your question concerning the purchase of individual bond issues.

You will find that many on this site will recommend going for the bond funds, and leaving this (relatively simple) work of checking responsibility and revenue base to "the experts." I have seen some really cruddy bonds included in bond fund portfolios, however. Bond funds themselves have ratings as well, and I'll leave it to the fund guys on the site to explain that. There are short-term funds and long- term funds, and rates can be expected to vary with the market. You will also find on this site very good practical advice on how to construct a bond ladder (different maturities), if you think today's rates are likely to be higher than most on your time horizon, and if you prefer to buy your own bonds. There is also the topic of liquidity of a bond fund to compare to the liquidity of individual issues, and the tax treatment of capital gains (if any).

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Unless you have a large amount to invest, it will be difficult for you to put together a well diversified bond portfolio -- diversified across different issuers, and different maturities.

Even if that's not an issue you should factor in the spread you pay to buy or sell a municipal bond. When you're earning small amounts of interest it can take awhile to earn back even a relatively small bond markup (vs the alternative of buying through a mutual fund that probably can buy and sell on better terms than you can).

Check the iShares site, they have some muni ETFs now and I believe they have some materials discussing the average bond trading cost, weighing that against the cost of a low-fee mutual fund or ETF.

People don't mention taxes often enough. With funds they deal with all that and you have simple bottom-line figures to report. With bonds it's different..if you buy and hold it's not as much of an issue but when you trade bonds the taxes can get pretty complicated. Small amounts, but still reportable amounts. See IRS publication 550, for example this section:

The other issue is taking money out. As a retiree you might want to draw say $300/month from your muni holdings. You can figure out ways to do that with a bond portfolio but with a mutual fund it may be easier.

Many people will gladly pay Vanguard or Barclay's a small management fee to avoid the hassles and potential embedded costs of individual munis.

-Tad

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.