Bonds and Fixed Income

[NJHowie]

I do not believe in mutual funds, especially when it comes to municipal bonds. If you are interested in investing in equities, but do not want to take the risks associated with individual stocks, I can appreciate gravitating towards those mutual funds.

However, when it comes to municipal bonds, a mutual fund offers almost no benefits in my view. Municipal bonds are extremely safe. Those that default are extremely rare, though the detractors can always point to their favorite headline-grabbing muni default. Out of the tens of thousands of municipal bond issues over the past 50 years, they can point to the 2 or 3 they know of. Warren Buffett is such a proponent of the safety of municipal bonds that he once proclaimed that the municipal bond insurers were really not necessary, because the defaults were so rare. He loved the business model so much, Berkshire began offering muni bond insurance, because Buffett claimed it was basically free money.

Moody's puts out a bi-annual report on defaults in the muni bond sector. Here is the latest version:
https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/fixed-income/moodys-investors-service-data-report-us-municipal-bond.pdf

The most important information is Exhibit 7, Page 11. Basically, if you stick to A-rated or better, the total historical default rate is on the order of 5 in 10,000. It's practically impossible to invest in one that will default.

I can write a novel on why folks with significant holdings should opt for individual municipal bonds over municipal bond mutual funds. The reasons are numerous, the mutual fund isn't really doing anything for you. The number of bonds/issues they hold is not beneficial - it hurts performance.

Let me know if you want me to lay out some of the points.