Tuesday, November 9, 2010

Don’t Try This At Home

A new study of the municipal bond market by research firm Aite Group recently concluded that “do-it-yourself-investors” could be harmed if they attempt to invest in municipal bonds without the benefit of an expert advisor.

The study’s author, Aite Group Senior Analyst John Jay, says that a lack of AAA-rated supply, decrease in the issuance of insured muni bonds, the need for specialized knowledge, and the idiosyncratic ways muni bonds can trade combine to make it inadvisable for do-it-yourself-investors to wade into this market.

I have traded muni bonds professionally at Meyer Capital Management for years and I too have watched the fundamentals of the muni bond market change dramatically since the financial crisis. Research that took me hours before the financial crisis now routinely takes days; and I know what I’m looking for. Smaller inventories, less attractive yields, and uncertain credit quality all pose challenges.

The biggest challenge, however, is discerning the creditworthiness of the issuer and its ability to successfully payoff its muni bond debt. Reporting requirements for muni bonds aren’t as stringent as they are for corporate bonds, so reliable information is scarce if you don’t know where to look and how to read what you find.

A default on a muni bond can wreak havoc with any investor’s portfolio. Jay advises private investors “without the luxury and benefit of an advisor” to forego individual muni bonds and stick with muni bond mutual funds or ETFs. That’s good advice.

Are you a do-it-yourself-investor who buys/sells muni bonds for your personal portfolio? I’d like to hear about your experiences.

Melissa Donovan
Managing Director

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