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Q

I was very pleased to stumble across your Web site and find a firm that supports my investment strategy. I therefore trust your answers to some questions that I have (and believe me, that says a lot). My family has invested in municipal bonds for generations and I have followed suit. I am currently managing my portfolio exactly as my father and grandfather do, but I have some questions that I would like you to answer because their answers are simply that it’s “the way we’ve always done it.”

First, I only buy long-term premium munis for the highest Yield to Call/Yield to Maturity that I can find, exactly as you suggest. I normally wait for the interest to build to a certain amount before I buy another bond. I do this because I can get a better price by buying a bigger chunk of bonds. It takes a few months to get to this point, and I sit on the cash in the meantime. (It’s actually in a type of money-market account.) If I don’t need all of the income to live off of, how would you suggest investing it until I have enough to buy another bond?

Second, I currently live in Washington, D.C., where my munis from all over the country are triple exempt. If I decide to move to New York for a few years with the intention of returning to D.C., what would you recommend doing? I obviously don’t want to liquidate my holdings and reinvest them in N.Y. bonds because, for one, I would get hosed on the bid/ask spread. Should I just weather the few years and pay the state and local tax? Third and finally, when a muni is pre-refunded, do you recommend selling it?

A

James A. Klotz responds:

Thank you for the kind words. It is always nice to hear from someone who has employed this strategy over the years, since you have experienced, first hand, how successful it has proven to be.

As a buy-and-hold investor you may want to investigate purchasing “odd lots” with the additional income accruing from your portfolio. These smaller blocks should actually be cheaper, unless you are buying a small piece of a larger block of bonds. We don’t recommend this when resale is a consideration.

You have probably answered your own question when it comes to your temporary relocation to New York (although you might want to look into the possibility of retaining your Washington D.C. domicile during this period). You are correct in thinking that transaction costs could prove more onerous than paying the New York tax.

We recommend selling pre-refunded bonds if the value of the bonds increases to such an extent that the “new” yield on these securities (return per dollar invested) becomes prohibitive. Although you will probably be unable to match the income, you should be able to have more principal working at a much higher yield. This opportunity is most prevalent when the pre-refunded date is at least four or more years away.