Municipal Bond Forum
Barbell?
Q
I have recently refinanced property I own that had $975,000 in equity. Now, after the refinance, I have about $480,000 left in equity and I will receive about $400,000 in cash. I’m 35 and already have $150,000 in the stock market (half of that is in my retirement accounts). My federal, state and local tax rate equals about 40%. I am not really interested in buying a place to live at this time. I am very interested in buying into the bond market, with two goals in mind: decreased tax liability and increased cash flow. I’m new to your site, so am only beginning to find out that you are the first source of information of the many I’ve consulted cautioning against a laddered municipal bond portfolio. But I wonder, what your thoughts are on a barbell portfolio? Or do you think it’s best simply to go for the highest yields within my comfort zone?
A
James A. Klotz responds:
We agree with your last thought. Determine the amount of funds that you can comfortably earmark for long-term investment and buy the highest yields available, commensurate with satisfactory credit quality.
The barbell approach sacrifices so much income that regardless of the direction of interest rates, you will be hard pressed to equal the return on long-term bonds even if rates do move higher.
The theory behind the barbell approach is to maintain some “dry powder” if interest rates rise and then commit these funds to long-term bonds. In our experience, picking this entry point is extremely tricky. Haven’t all the experts been predicting higher rates for the last four years?
Start here.
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