With a stock market pushing to record levels, it’s not hard to understand why so many investors are buying stock equities and mutual funds. Stock investors have seen their portfolios fatten over the last few years.
But with many wondering if the stock market is due for a correction, some financial advisors and analysts believe now is the time to hedge bets against inflation and consider investing in bonds.
Despite a dip that saw bonds and bond funds lose about 11 percent of their value two years ago, some analysts think the market is poised for another long-term rise.
If you’re considering investing in bonds issued by colleges and universities, they are considered relatively stable investments because institutions of higher education rarely default on their bonds. Close scrutiny by WAll Street bonds ratings firms and other educational and fiscal monitoring agencies make universities a good bet, say investment experts.
“They’re good investments for mom and pop’, college alumni who are interested in supporting their alma mater while building their portfolio for the future,” says a noted Wall Street bond expert. “They’re good to hold in the account and wait for maturity. It’s also good psychologically to know you can provide some behind the scenes support for a college.”
Bonds, suggest financial advisers offer stock market investors an excellent opportunity to protect their stock gains and balance their portfolios with a stable investment with a guaranteed fixed rate.
Most of all, bonds are for the patient investor, those who seek tax advantages and investments that will yield rewards in the later years. Most municipal bonds are sold in denominations of$5,000 to $10,000. On occasion, investors can purchase “mini-bonds” issues that are sold in units of $1,000. Maturity comes in differing periods ranging from 10 to 30 years.
Like stocks that are blended into mutual funds and administered by fund managers, bonds are also sold In mixed funds such as the USAA Tax-Exempt Intermediate Term and the Vanguard Muni Intermediate.
Research the Issuer
Are higher education Municipal bonds for you? If you’re seeking tax-free advantages and want a long-term nest egg, they might be just what you need, say financial advisers. They’re especially good for investors in the 30 percent to 36 percent federal income tax bracket.
But, before you buy individual bonds or funds, study their performance and rating, and carefully consider the issuer, the educational institution, municipality or government agency behind them. While highly rated bonds are considered safe investments, one only has to remember the Orange County (CA) bankruptcy after risky investments to realize you should proceed with caution. It is better to stick to insured bonds.
To decide whether to invest in a tax-free bond, financial advisers suggest you determine whether it will pay more than a taxable investment upon maturity. One measuring stick is the yield. Will the bond pay more than you could get from a taxable bond?
Compare the after-tax returns with those of taxable government issues. You want to get at least 0.2 to 0.5 percentage points more with municipals than YOU can get by owning higher-quality U.S. Treasury Bonds, suggest the editors of Money magazine.
If you are in the 31-percent tax bracket and pay 5 percent in state income tax and 3 percent in local tax, a municipal bond yielding 6 percent and free of state and local taxes will pay as much as a taxable bond that yields 6.6 percent.
A similar bond that is exempt from federal taxes is the equivalent of a taxable bond with a 8.7 percent yield. According to MoneY, if it is exempt from federal, state and local taxes, it is equivalent to a taxable bond paying 9.5 percent.
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