Five Steps To Consider With Municipal Bonds

OCEAN CITY -- Municipal bonds, like all investments, can be sensitive to market swings and the overall state of the economy. Here, five ideas you and your advisor should consider to keep your portfolio in line with your individual needs and goals. 

1. Be selective: Municipal bonds come with varying degrees of quality, risk and return. Simply choosing the bond from your home state that provides you with the greatest tax efficiency may not best suit your needs. Review your municipal bond holdings with your advisor, to see to it that the mix still effectively addresses your individual objectives.

Also learn as much as you can about the bonds in your portfolio, including their credit rating, the issuer, the revenue source and what the proceeds are used for. These can all be key to the overall health of your investments.

2. Stay with higher-quality bonds: High-quality municipals — AA and AAA rated — are typically less affected in times of market volatility, and also less likely to default. High-quality bonds typically include general obligation bonds (or GO bonds), which are fully backed by the issuer, as well as essential service revenue bonds, which benefit from having dedicated sources of revenue such as power, water and sewer operations. Special projects such as bridges and toll roads can also be sources of higher-quality bonds.

3. Keep your portfolio well-diversified: When considering your muni holdings, take into account both the variety of issuers and geographic region. Look at bonds from states outside your own, as well as different kinds of issuers within your state.
4. Look at "barbells": You could benefit from a "barbell" approach that combines short-term and longer-term municipal bonds. Shorter maturities — from six months to three years — can better serve your potential liquidity needs, while longer-term bonds — of 10 to 20 years — can help you capture greater yield. Keep in mind that bonds with shorter maturities typically have relatively low yields and can command a premium price, but they offer greater protection against both market volatility and rising interest rates.

5. Consider active management: Actively managed municipal bond mutual funds, exchange traded funds (ETFs) and separately managed accounts (SMAs) can help you maintain a well-diversified municipal bond portfolio. In addition, they are often a convenient alternative to directly purchasing individual bonds, and managers regularly monitor the credits that they hold to keep portfolios in line with their investment objectives.

Whatever approach you choose, review your holdings regularly and make whatever adjustments are needed so that your portfolio continues to serve your individual needs and goals.

As always, talk with your financial advisor to see to it that your investments fit your long-term financial strategy.