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Building recurring monthly income via Tax Free Muni Bonds

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Money Talk > Investing, Stocks and Bonds

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oldguy
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quote:
don't seem to carry the extreme risk I keep hearing about (historically).


IMO, you are misinformed. Go back to basics - why do some people have to pay >10% for sub-prime mortgages, or for high-risk car loans? It's because the probability of failure is high and the lender needs to be rewarded for assuming the risk.

Same with bonds - why would a city/corporation/entity offer to pay 17% for loans (bonds)? The reason is - their credit is horrible, no one will lend them money unless they offer a toxic rate to reward the lender for the high risk.

Again, you might want to look into the study of risk management. The Law of risk - "risk and return are directly proportional" doesn't bend. Anytime that you think that a 17% bond has less risk than an 11% stock index, it means that you have been over-sold, over-marketed, and that the risk has been well masked.
Post Tue Mar 22, 2016 2:55 pm
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MoneyMaker2016
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quote:
Originally posted by oldguy
quote:
don't seem to carry the extreme risk I keep hearing about (historically).


IMO, you are misinformed. Go back to basics - why do some people have to pay >10% for sub-prime mortgages, or for high-risk car loans? It's because the probability of failure is high and the lender needs to be rewarded for assuming the risk.

Same with bonds - why would a city/corporation/entity offer to pay 17% for loans (bonds)? The reason is - their credit is horrible, no one will lend them money unless they offer a toxic rate to reward the lender for the high risk.

Again, you might want to look into the study of risk management. The Law of risk - "risk and return are directly proportional" doesn't bend. Anytime that you think that a 17% bond has less risk than an 11% stock index, it means that you have been over-sold, over-marketed, and that the risk has been well masked.


I'm not saying there isn't risk. What I'm saying is that based on my research, it doesn't seem like people go broke buying high yield bonds and holding them for 10, 20, 30 years and it doesn't seem like a default of one or two bond in a fund kills the principal or yield.
Post Tue Mar 22, 2016 3:04 pm
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oldguy
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Risk is good, it is required to make money. But your goal is low risk, income fund. And you are invested in the opposite

The only reason that someone wants to borrow money from you at 17% is that their credit is so bad that they cannot borrow at 5% - or 10 % - or even 15%. Your research is faulty, do some standard deviation math.
Post Tue Mar 22, 2016 4:37 pm
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MoneyMaker2016
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quote:
Originally posted by oldguy
Risk is good, it is required to make money. But your goal is low risk, income fund. And you are invested in the opposite

The only reason that someone wants to borrow money from you at 17% is that their credit is so bad that they cannot borrow at 5% - or 10 % - or even 15%. Your research is faulty, do some standard deviation math.


You're talking theory. I looked at real examples of default and the result for the investor in terms of principal and yield. Nothing dramatic happened.

Now if you have a real life example of this theoretical high risk being a "real life problem" or "highly probable" based on whats being invested in, in the fund. I am all ears. That's really what i'm looking for. I even called the funds to discuss. Waiting to hear back.

BTW: My goal isn't necessarily low risk, income. It's fixed income at a livable rate (4-6% interest)
Post Tue Mar 22, 2016 5:00 pm
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oldguy
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quote:
Now if you have a real life example of this theoretical high risk being a "real life problem" or "highly probable" based on whats being invested in, in the fund. I am all ears.


lol - no examples, I'm willing to allow you to test your hypothesis - and then report back in a year or two.

I may have mentioned this earlier? But here is how I manage risk. I keep my high risk and low risk groups "pure". Ie, I use the SP500 Index Fund for my 'risk', it returns 11%/yr on average. And I use a short duration (3.5y) bond fund for my 'safe' money, about a 5% return. And I do a 'top down' mix to arrive at my desired risk. If I want a 5% risk, I invest at 0% stock/100% bonds. If I want an 8% risk, I use a 50/50 mix. (The average of 11% & 5%. And if I want more risk I move toward 100%/0%.
But I avoid buying the extremists of either category - ie, no junk bonds in my 'safe' group - and no 'venture' stocks in my 'risk' group - it isn't necessary.
Like I said - risk is necessary - but uncompensated risk is the worst kind, you need to be compensated for the risks that you take.
Post Tue Mar 22, 2016 6:21 pm
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MoneyMaker2016
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quote:
Originally posted by oldguy
quote:
Now if you have a real life example of this theoretical high risk being a "real life problem" or "highly probable" based on whats being invested in, in the fund. I am all ears.


lol - no examples, I'm willing to allow you to test your hypothesis - and then report back in a year or two.

I may have mentioned this earlier? But here is how I manage risk. I keep my high risk and low risk groups "pure". Ie, I use the SP500 Index Fund for my 'risk', it returns 11%/yr on average. And I use a short duration (3.5y) bond fund for my 'safe' money, about a 5% return. And I do a 'top down' mix to arrive at my desired risk. If I want a 5% risk, I invest at 0% stock/100% bonds. If I want an 8% risk, I use a 50/50 mix. (The average of 11% & 5%. And if I want more risk I move toward 100%/0%.
But I avoid buying the extremists of either category - ie, no junk bonds in my 'safe' group - and no 'venture' stocks in my 'risk' group - it isn't necessary.
Like I said - risk is necessary - but uncompensated risk is the worst kind, you need to be compensated for the risks that you take.


I've been in both funds for two years already, no complaints.

Which s&p index fund are you in?

Which 3.5yr bonds are giving 5%?
Post Tue Mar 22, 2016 7:03 pm
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oldguy
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quote:
Which s&p index fund are you in?

Which 3.5yr bonds are giving 5%?


1. I have some Fidelity FUSVX and some Vanguard VFIAX - but most all fund companies sell an SP500 Index Fund.

2. I have VFIIX, it's a Vanguard GNMA Fund, the 10 yr return is 4.61%/yr, the return since inception is 7.55%/yr. (I've had it for 15 or 20 yrs.). The duration is 3.3 years.
Post Tue Mar 22, 2016 9:24 pm
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MoneyMaker2016
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quote:
Originally posted by oldguy
quote:
Which s&p index fund are you in?

Which 3.5yr bonds are giving 5%?


1. I have some Fidelity FUSVX and some Vanguard VFIAX - but most all fund companies sell an SP500 Index Fund.

2. I have VFIIX, it's a Vanguard GNMA Fund, the 10 yr return is 4.61%/yr, the return since inception is 7.55%/yr. (I've had it for 15 or 20 yrs.). The duration is 3.3 years.


What's the difference between those and

FUSEX

and

VFINX

?
Post Wed Mar 23, 2016 2:49 pm
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oldguy
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quote:
What's the difference between those and
FUSEX
and
VFINX


Account size. It costs more to handle the paperwork, mail 1099s, etc, for 500 - $1000 accounts than for one $500,000 account. So the company might charge a 0.1% fee for the 500 accounts and .0.005% for the larger account. (The money managed is the same in both scenarios, $500,000).

So the fund companies select thresholds (eg, $10k, $50k, $100k) and renumber their fund symbols.
Post Wed Mar 23, 2016 3:23 pm
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MoneyMaker2016
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quote:
Originally posted by oldguy
quote:
What's the difference between those and
FUSEX
and
VFINX


Account size. It costs more to handle the paperwork, mail 1099s, etc, for 500 - $1000 accounts than for one $500,000 account. So the company might charge a 0.1% fee for the 500 accounts and .0.005% for the larger account. (The money managed is the same in both scenarios, $500,000).

So the fund companies select thresholds (eg, $10k, $50k, $100k) and renumber their fund symbols.


Got it. If i'm throwing in $200k-$500k at a time, does one have an advantage over another?

I'm seriously considering:

SPY
DIA
VFINX
Post Wed Mar 23, 2016 3:27 pm
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oldguy
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SPY and VFINX are the same investment - ie, a fund containing the unmanaged SP500 Index. The SPY trades like a stock, ie it trades all day and you pay a trade commission. The VFINX is a mutual fund, it trades after-hours, after the daily closing.

The DIA is an ETF that holds the 30 Dow Jones blue chip stocks - IMO it's very narrow, I prefer to spread my money across the 500 major companies, if a single company goes bk the effect on the 500 is minimal.

In my world, the most straight forward method is to invest in the SP500, accept the 11%/yr return, and avoid the barrage of "beat the market' ideas. Eg, your $1M would be about $23M in 30 yrs.
Post Wed Mar 23, 2016 3:55 pm
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MoneyMaker2016
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quote:
Originally posted by oldguy
SPY and VFINX are the same investment - ie, a fund containing the unmanaged SP500 Index. The SPY trades like a stock, ie it trades all day and you pay a trade commission. The VFINX is a mutual fund, it trades after-hours, after the daily closing.

The DIA is an ETF that holds the 30 Dow Jones blue chip stocks - IMO it's very narrow, I prefer to spread my money across the 500 major companies, if a single company goes bk the effect on the 500 is minimal.

In my world, the most straight forward method is to invest in the SP500, accept the 11%/yr return, and avoid the barrage of "beat the market' ideas. Eg, your $1M would be about $23M in 30 yrs.


When you say "invest in the SP500", which symbol exactly?
Post Wed Mar 23, 2016 4:07 pm
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oldguy
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quote:
When you say "invest in the SP500", which symbol exactly?


If you like Vanguard it is VFIAX. If you like Fidelity it is FUSVX. If you are buying from a brokerage (such Schwab) you would buy SPY. But any (all?) brokers, mutual fund companies, and no-load fund companies have a vehicle for investing in the SP500 Index.
Post Wed Mar 23, 2016 4:29 pm
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MoneyMaker2016
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quote:
Originally posted by oldguy
quote:
When you say "invest in the SP500", which symbol exactly?


If you like Vanguard it is VFIAX. If you like Fidelity it is FUSVX. If you are buying from a brokerage (such Schwab) you would buy SPY. But any (all?) brokers, mutual fund companies, and no-load fund companies have a vehicle for investing in the SP500 Index.


What if I am buying through Citi?
Post Wed Mar 23, 2016 5:58 pm
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oldguy
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Probably not a good plan. Banks are for banking, brokers are for investing. Banks are good for checking, savings, CDs - but notoriously bad for investing, their main products are retail (full-service) mutual funds, annuities, etc. I would stick with the investment firms - Vanguard, Fidelity, TR Price, Schwab, etc.
Post Wed Mar 23, 2016 8:47 pm
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