Money Dilemmas

Meg Green: When ‘safe’ investments hit the danger zone


Special to The Miami Herald

The dilemma: Since I sold my business in 1992, I’ve only invested in municipal bonds. I have three different brokers who call me when something good comes up or when one of my bonds comes due or is called. I play one against the other so I always know what’s good.

My CPA has brought to my attention that this is no longer a good way to manage my money because of how the bonds are not doing well. He thinks I should invest in real estate and stocks for income, which I have been afraid to do all these years. My bond brokers say he’s not right. They always have a good bond for me, and if I hold it to maturity I’m OK. The newspapers, magazines and TV tell me differently. What is your opinion?

Meg’s solution: Welcome to the end of a 30-year bull market in bonds. This is an awkward time for muni investors, so your uncertainty is warranted.

First question: How wealthy are you?

If you sold your business for gazillions, have no interest in expanding your wealth, and can live well within the interest you’re receiving, then you can have a more cavalier attitude about your portfolio.

But if you’re not uber wealthy and actually care about maintaining or even growing your principal, then you’ll have to step away from your “blankie” and reconsider assets that can appreciate over time. Bonds will not do that in a rising rate environment.

The quality of the bonds you own makes all the difference in the world. You’d have to keep your head in the sand to ignore how fragile some municipalities have become. Detroit is one loud example. The problem is, high quality bonds don’t yield as much as lower rated ones.

Many bond buyers ask what the bond pays, and that’s all that matters to them. To me, quality is everything in this market. When a provider defaults, that’s it. You can lose your principal as well as your interest.

And then there’s the duration of bonds, or how long before they’re due or due to be called. If a bond has duration of 10 years, let’s say, then for every 1 percent increase in interest rates, your bond value will decline in theory by 10 percent. Unmanaged, this can be ugly in a rising rate environment. A longer duration bond will yield more, to pay you for the risk of holding it for a long time, but today, that is a real risk. Bonds decline in value when rates rise, and you may not have the time or desire to wait for maturity.

So, now that my little tutorial is over, let’s talk about what to do.

First of all, I strongly believe that having an institutional municipal bond manager can save you angst and costs. They have the research to know exactly what stress that bond may or may not have on its ability to pay, thus potentially keeping you out of default trouble. They also purchase net of mark ups and commissions and monitor the portfolio regularly, as one must, to make sure that none of your holdings become less than worthy.

It’s no longer a buy and hold world. Institutional managers trade the bonds in a portfolio instead of letting them just take the ride. This can allow for premium bonds and better yields, when done right. And yes, you need bonds in your portfolio for income. But they’re still not going to be stellar performers for a while.

Bottom line, if you have any care or concern about your principal, and I suspect you may since you wrote to me, then I say look towards institutional investing and diversification into U.S. and international equities and fixed income.

Real estate for income is nice too, if you can find a good way to get in.

Sorry, but unless you’re totally loaded, you should be looking to preserve, protect and potentially grow your portfolio on a tax sensitive basis.

Stop buying what comes in the door. Instead, start looking for a well regarded wealth management firm to bring you into this century. Kudos to your CPA for the “heads up.”

Got a dilemma? Email askmeg@ meg green .com. Meg Green, CFP, is a wealth manager with offices in Aventura. Her Money Dilemmas column runs monthly in The Miami Herald.

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