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Q

Stock brokers and “experts”  speak about the “equity premium,” the rate of return over what would be the rate of a risk-free investment, such as short-term government debt. I see figures of 3 % to 8 % quoted. They also say the best place for long-term money is in equities. What does long-term mean, and who keeps their money in one stock or mutual fund long term? Are taxes considered? Am I wrong or does a portfolio of long-term municipals paying 4% to 6 %  tax free offer less risk and the same return without making the broker rich? Is this a well-kept secret that brokerage houses do not want us to know?

A

James A. Klotz responds:

Once again your logic is irrefutable.

It was your e-mail in January 2010 that prompted our commentary, “Maybe it’s Just Too Simple.” At that time, we said the likely answer to your question is that municipal bonds are designed to be “purchased, held and enjoyed for the income they generate.”

Many stock brokers have little interest or incentive to sell financial products that may keep their clients’ funds captive for lengthy periods of time.

Also, the “experts” often want to convince you that successful investing involves sophisticated techniques that require their advice to employ.

Your conclusion is correct and it shouldn’t be such a well-kept secret. Investors watched major brokerage-houses vaporize their businesses by making imprudent investments with their own funds.

We are not sure why this isn’t obvious to everyone, but we are pleased many investors like you have figured it out.