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Q

Is your strategy always to buy the best yield possible and hold? Is there ever a reason to sell or wait to buy for better yield? In the current environment, conventional wisdom says that I should construct a bond ladder, don’t go too long in search of yield, etc. But if I am buying for income and a better return for the amount of risk, is there an argument for buying shorter-term munis, maybe less than seven years?

A

James A. Klotz responds:

You have defined our municipal bond philosophy quite accurately: We recommend, after your credit quality requirements are satisfied, maximizing tax-free income on every purchase. Invariably this requires buying longer-term bonds.

Our buy-and-hold approach means we never suggest selling bonds to take a profit, as you will be unable to replace the income and will create a taxable event.

On the other hand, we often recommend executing “tax-swaps.” A loss for tax purposes can be established by simultaneously exchanging some of your bonds that are depressed in value for similar bonds. We employ this strategy for clients who want to offset capital gains taxes, or reduce adjusted gross income by $3,000.00 per year. These tax losses can also be carried forward into ensuing years, dollar for dollar.

Buying short-term bonds can sacrifice 40% to 50% of reinvestable tax-free income. And tax-free income should be the reason you are buying municipal bonds in the first place.

Keep in mind, over the lifetime of your long-term bonds, they will sometimes be worth more than you paid for them and sometimes less. With a long-term investment horizon, this becomes irrelevant. It is also worth noting, tax-free bonds can pass through your estate as easily as cash.