Should I switch from a muni bond ladder to a bond fund?

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samw1918
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Should I switch from a muni bond ladder to a bond fund?

Post by samw1918 » Wed Oct 25, 2017 3:46 pm

About a year and a half ago I finally got around to rounding up all of our assets that were in different accounts. Decided to consolidate everything at Fidelity because that is where my employee 401k was. I am only a couple years from retirement and was pleased to see what our total assets were. The advisor suggested a muni bond ladder because of our tax bracket, which we started in July 2016. I am somewhat better informed now, and am wondering whether I should have just put my bond allocation into a diversified index bond fund. I am worried that I will lose money selling the bonds now and putting the money into a bond fund. I would appreciate any advice.

Longdog
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Re: Should I switch from a muni bond ladder to a bond fund?

Post by Longdog » Wed Oct 25, 2017 3:56 pm

If they are highly rated bonds, one way to do this is to invest the coupons into a bond fund and when they mature or are called, invest the proceeds into the bond fund. But it also depends how many bonds you have and what percentage each one is of your bond portfolio. It doesn’t have to be an all or nothing, one time decision.
Steve

stlutz
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Re: Should I switch from a muni bond ladder to a bond fund?

Post by stlutz » Thu Oct 26, 2017 12:57 am

The answer is a firm, "it depends".

Factors to consider:

--when do the bonds mature? I'd be more inclined to hold a 5 year ladder until maturity. A 30 year ladder would be different.

--What are the bonds' credit ratings? I'm more inclined to hold onto AA/AAA rated bonds and sell lower-rated ones.

--Are the individual bonds from a number of states or just one? I'm okay holding a diversified portfolio of bonds; I would be more inclined to sell if I only had, say, Ohio bonds.

--Do you find the individual bonds to be a PITA? Some people find them to be a big challenge; others don't see what the big deal is--collect interest twice a year and get a principal payment at call/maturity.

If you are going to use a fund or ETF at Fidelity, I personally would just use VTEB (the Vanguard muni ETF) as it has a much lower ER than any of the Fidelity/iShares options. The $4.95 commission is worth it.

Disclosure: I own individual bonds, bond funds, and bond ETFs.

samw1918
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Re: Should I switch from a muni bond ladder to a bond fund?

Post by samw1918 » Fri Oct 27, 2017 1:14 pm

Excellent questions. I will look into this. Thanks to all for the advice!

Random Walker
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Re: Should I switch from a muni bond ladder to a bond fund?

Post by Random Walker » Fri Oct 27, 2017 1:39 pm

I’m a fan of Muni ladder. Check out the Larry Swedroe article below.

Dave

http://etf.com/sections/index-inves ... nopaging=1

samw1918
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Re: Should I switch from a muni bond ladder to a bond fund?

Post by samw1918 » Mon Oct 30, 2017 6:48 pm

Thanks for the link to that great article, Dave!

Case59
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Re: Should I switch from a muni bond ladder to a bond fund?

Post by Case59 » Mon Oct 30, 2017 9:29 pm

Interesting stuff. Is there a link or a primer on how to go about the specifics of buying individual munis?
"Most quotations on the internet are incorrect."-Mark Twain

Random Walker
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Re: Should I switch from a muni bond ladder to a bond fund?

Post by Random Walker » Tue Oct 31, 2017 12:55 am

The only things I’ve read about purchasing individual municipal bonds is that an individual amateurs overwhelmingly shouldn’t do it. So much is opaque. There are lots of variables. For what it’s worth, I’m about 90% taxable accounts, and one of the reasons I signed up with a fiduciary advisor after being a do it myself Boglehead for almost a decade was for management of a Muni ladder.

Dave

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CaliJim
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Re: Should I switch from a muni bond ladder to a bond fund?

Post by CaliJim » Tue Oct 31, 2017 1:04 am

Random Walker wrote:
Tue Oct 31, 2017 12:55 am
The only things I’ve read about purchasing individual municipal bonds is that an individual amateurs overwhelmingly shouldn’t do it. So much is opaque. There are lots of variables. For what it’s worth, I’m about 90% taxable accounts, and one of the reasons I signed up with a fiduciary advisor after being a do it myself Boglehead for almost a decade was for management of a Muni ladder.

Dave
LOL

Yes indeed. Same thing here. Lots in taxable too. But 90%. Congrats. Wow!

The muni bond market is very complex when you peel back the layers of the onion, and the experts have SOFTWARE into which they plug in the all the variables and calculate their prices. And there IS a retail markup that must be paid. When you buy in small quantities, transaction costs go up!

In my case, a few of the reasons I left my advisor and the bond ladder he maintained for me, and became a boglehead was:

1) I finally got comfortable with the excellence of the Vanguard Bond Fund approach, and
2) The cost of the fiduciary advisor was enormous compared to the ER of the bond funds

IMHO, at the end of the day, over a 20 or 30+ year period of time, (my retirement) I think the intermediate bond fund approach yields very very very similar results to a rolling intermediate ladder, only with much less expense, more diversity, and less HEADACHE.
Last edited by CaliJim on Tue Oct 31, 2017 1:33 pm, edited 1 time in total.
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Chip
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Re: Should I switch from a muni bond ladder to a bond fund?

Post by Chip » Tue Oct 31, 2017 5:21 am

Do you own any stock funds in your tax-deferred accounts? If so, it might make sense to swap them out for taxable bond funds and buy stock funds in taxable with the money that's in the muni bonds. Keeping your overall allocations the same, of course.

Random Walker
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Re: Should I switch from a muni bond ladder to a bond fund?

Post by Random Walker » Tue Oct 31, 2017 12:57 pm

I think there are times when small odd lots of Muni bonds can be purchased at a good price. The big institutional guys don’t want to mess with such small numbers. Once again though, I’m too naive to recognize these situations, so I depend on fiduciary advisor to purchase the bonds.

Dave

jdb
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Re: Should I switch from a muni bond ladder to a bond fund?

Post by jdb » Tue Oct 31, 2017 4:37 pm

At the SatuMedia conference a couple weeks ago a fellow attendee and friend told me he was considering the opposite, converting his bond funds into a muni ladder, a friendly financial institution would do it for 40 basis points. I told him that I have a muni ladder which I accumulated years ago using small lots and also Vanguard muni bond funds. I recommended that he save the 40 basis points and stick with the funds. And my response to the OP is to stick with his muni bond ladder already established. Both are useful but very similar, primary difference is psychological, one sees the fluctuations in NAV in bond funds but most investors ignore fluctuations in individual bonds. And one thing I never do with individual muni bond ladder is sell any of the issues, to avoid transfer costs, hold each one to redemption or maturity. Good luck.

Random Walker
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Re: Should I switch from a muni bond ladder to a bond fund?

Post by Random Walker » Tue Oct 31, 2017 8:53 pm

I believe One potential advantage of individual bonds is the ability to tax loss harvest at the individual bond level.

Dave

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