Q. Why don’t you buy only municipal bonds issued by the state of my residence?
A. I believe that owning only single state municipal bonds is akin to playing Russian roulette – i.e., by putting all your money on the financial stability of one state. While it might save some local taxes over time ─ it’s just not prudent.
A recent article in Barron’s magazine fortuitously highlights this point. (Barron’s Magazine, August 27, 2012). They measured the combination of every state’s combined debt and unfunded pension liabilities relative to GDP. The article highlighted the State of Connecticut at the very bottom of the list with a combined score of 17% [and with no pricing benefit for the additional risk over, for example, South Dakota (No. 1)]!
Since the purpose of owning municipal bonds is to own a less volatile asset class that generates Federal tax-free income, it’s simple common sense to diversify your holdings so that no one state’s financial condition can affect your portfolio significantly.
As always, email me at email@example.com with your questions or comments.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.