"Money File"-Bonding With Muni's
Wednesday, January 21, 2009SUSIE GHARIB: In the "Money File" tonight, investing in bonds, municipal bonds. Here's Jason Zweig, personal finance columnist at the "Wall Street Journal."
JASON ZWEIG, PERSONAL FINANCE COLUMNIST, WALL STREET JOURNAL: Thinking big certainly got a lot of investors into trouble in recent years. How about thinking small? Instead of buying overpriced Treasury bonds from the U.S. government, why not invest in dirt-cheap bonds issued closer to home? No matter where you live, municipal bonds offered by your state, county and local governments are probably selling at bargain prices and the interest is tax-free. Municipal bonds or munis, are now yielding up to twice as much as Treasury securities, the widest gap in at least half a century. You would have to earn 6 to 9 percent on taxable bonds to match what you can get on munis. You can buy muni bonds from a broker or sometimes even directly from the local issuer, but most investors are better off with a tax-free mutual fund or exchange-traded fund. Steer clear of anything with high yield or high income or yield plus or ultra in the name. You want a muni fund, not a loony fund that can expose you to unnecessary excess risk. Try to get a medium-term or intermediate offering that will not over-invest in riskier long-term bonds. A national fund is fine unless you live in a high-tax state like California or New York, where you should choose one that makes a specialty of in-state bonds. Finally, look for funds with annual expenses of half a percentage point or less. You want to lower your taxes without raising your fees. I'm Jason Zweig.
