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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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MoneyMaker2016
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Originally posted by oldguy
but notoriously bad for investing, their main products are retail (full-service) mutual funds, annuities, etc. .


Can you elaborate on this? I've had no issues using citi. Am I not aware of their premium or hidden fees?
Post Wed Mar 23, 2016 8:49 pm
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oldguy
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OK. Banks have a rep for selling high fee, high profit items 'inappropriately' (not illegally). A few years ago Congress was debating whether an investigation was needed, bankers were, as your trusted banker' taking elderly couples out to dinner and then selling them inappropriate annuities, things that would have been worthless to 80 year-olds. But, in general, banks push whatever the Main Office buys at discount and pushes onto the Branch Banks. So the bankers put on the pressure to sell the stuff - and the winners get their free all expenses paid trip to Disney for the family.


Some oldguy Rules.

1. Landlording. Never rent to an acquaintance, a coworker, a friend, and never ever to a relative, you want an arms length formal agreement with a stranger.

2. LIfe insurance. Never mix life insurance with investing, you'll get the worst of both. And never get "sold" something, if you want life insurance go out and find your own supplier and buy from him/her. (see rule 1)

3. Banks, brokers. Use banks for banking, brokers for investing.

4. Selections. Realtor (see rule 1), you don't want uncle louie who 'used to' sell houses. Lawyer, you don't want your wife's cousin who nearly finished law school. And so on - rule 1 works for many things. Concrete. Old buddy sometimes pours driveways, he can do yours on weekends for half price. Car repair. Floor tile. The list is long.


Let me turn your question around - why would you WANT to buy investments from a bank instead of a broker? (Who sold you the junk bonds?)
Post Thu Mar 24, 2016 12:10 am
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MoneyMaker2016
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quote:
Originally posted by oldguy
OK. Banks have a rep for selling high fee, high profit items 'inappropriately' (not illegally). A few years ago Congress was debating whether an investigation was needed, bankers were, as your trusted banker' taking elderly couples out to dinner and then selling them inappropriate annuities, things that would have been worthless to 80 year-olds. But, in general, banks push whatever the Main Office buys at discount and pushes onto the Branch Banks. So the bankers put on the pressure to sell the stuff - and the winners get their free all expenses paid trip to Disney for the family.


Some oldguy Rules.

1. Landlording. Never rent to an acquaintance, a coworker, a friend, and never ever to a relative, you want an arms length formal agreement with a stranger.

2. LIfe insurance. Never mix life insurance with investing, you'll get the worst of both. And never get "sold" something, if you want life insurance go out and find your own supplier and buy from him/her. (see rule 1)

3. Banks, brokers. Use banks for banking, brokers for investing.

4. Selections. Realtor (see rule 1), you don't want uncle louie who 'used to' sell houses. Lawyer, you don't want your wife's cousin who nearly finished law school. And so on - rule 1 works for many things. Concrete. Old buddy sometimes pours driveways, he can do yours on weekends for half price. Car repair. Floor tile. The list is long.


Let me turn your question around - why would you WANT to buy investments from a bank instead of a broker? (Who sold you the junk bonds?)


I learned about the junk bonds from my grandfather. It was an (I believe the term is) unsolicited order. Does that still mean the bank is charging a premium on the fees?
Post Thu Mar 24, 2016 12:38 am
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oldguy
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They charged you a sales fee, maybe 5% to 8%. And they charged you the difference between discount and retail. And when you sell, both will be repeated.
But the big issue is that they are selling inappropriate products to you, there is no way that you should be in junk bonks, you were looking for income, not a lottery ticket. lol. And as a retailer, the bank should be giving you advice, not putting you into junk.
Post Thu Mar 24, 2016 2:15 am
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oldguy
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By coincidence, I just saw this on another message board -

quote:
I met with a client recently who started saving/investing in the year 2000. Fresh out of college and in her first job, she took the advice of an advisor at a bank, opened a Roth IRA, and began having a small amount of money withdrawn from her checking account each month to be invested in two mutual funds. No problems so far.

The only issue is the two funds they put her in were bond funds, one with class A and one with class B shares.

So, not only is she in funds that were completely inappropriate for her age and risk tolerance at the time, they also had heavy load fees.

16 years later, I'm wondering WTF her advisor was thinking, unless it was about his commission.
Post Thu Mar 24, 2016 2:29 am
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MoneyMaker2016
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quote:
Originally posted by oldguy
They charged you a sales fee, maybe 5% to 8%. And they charged you the difference between discount and retail. And when you sell, both will be repeated.
But the big issue is that they are selling inappropriate products to you, there is no way that you should be in junk bonks, you were looking for income, not a lottery ticket. lol. And as a retailer, the bank should be giving you advice, not putting you into junk.


Don't know what you're talking about. I didn't pay any sales fees at all.

I also choose the products, not the investment banker.
Post Sat Mar 26, 2016 1:20 pm
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oldguy
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quote:
If i'm throwing in $200k-$500k at a time
Don't know what you're talking about. I didn't pay any sales fees at all.


Now that you're closing the business and have some time, it might be good to do some research on how markets and securities work - maybe take a course at a local Com College?

It's not in your best interest to go to banks - order $200k-$500k of mystery junk at a whack. Check out Vaguard, Fidelity, Schwab, TRPrice, brokers that know their products and can be great sources of info.

You have a great opportunity - a million in capital and your youth, ie 30 years to grow it. That is worth spending some research time. A few thought-out moves will turn $1M into $20M - and avoid the expensive pitfalls & mistakes.
Post Sat Mar 26, 2016 3:58 pm
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MoneyMaker2016
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quote:
Originally posted by oldguy
quote:
If i'm throwing in $200k-$500k at a time
Don't know what you're talking about. I didn't pay any sales fees at all.


Now that you're closing the business and have some time, it might be good to do some research on how markets and securities work - maybe take a course at a local Com College?

It's not in your best interest to go to banks - order $200k-$500k of mystery junk at a whack. Check out Vaguard, Fidelity, Schwab, TRPrice, brokers that know their products and can be great sources of info.

You have a great opportunity - a million in capital and your youth, ie 30 years to grow it. That is worth spending some research time. A few thought-out moves will turn $1M into $20M - and avoid the expensive pitfalls & mistakes.


Well, I'm listening. Tell me what you're thinking, what would you do in my shoes?

Regarding the banking, I still can't understand the issue. Citi Investments is a brokerage (not the personal banking which is separate). The investments were "unsolicited" and although the brokerage gets paid part of the "management fees", I did not pay a front end fee (class a and no load because of the size of my initial investment) and did not pay 5-8% sales fees or any other fees, I purchased the funds based on my own research. The investment banker doesn't decide where I put my money.

As for the specific investments, they've done fine over the last 10-16 years as buy and hold investments. I enjoy the fixed income and plan to hold them both for 15-30 yrs. As long term investments, based on my research, they are fine (although not a get rich quick or $19MM increase). It's not mystery junk, I looked through the bonds they invest in and reviewed the default rate over the last 16 yrs along with the change in NAV. Nothing dramatic that I can see...... so please be specific as to the actual concerns vs the vague comments about them being "bad"?

To get to $20MM in the short term (not 20, 30 yrs....), in my opinion, the wealth needs to be created, not come from investments. I need to start another biz that will generate $500k-$1.5MM+ in net to myself per year and reinvest it. JMO.

BTW: $2M+ in capital, not $1M Smile
Post Sat Mar 26, 2016 4:07 pm
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oldguy
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quote:
http://ymam.proboards.com/thread/49022/bang-head-wall



""so please be specific as to the actual concerns vs the vague comments about them being "bad"? ""
I can't help you with that, I've been using investment companies and avoiding banks for over 50 years - so my info is second hand.
The site above quoted is from another message board, they are arguing the same topic. (don't know if you can pull it up w/o logging in?) But, in general, banks deal in high fee, high commission products that do for them what you want to do, ie provide a low risk steady income to the bank for the longterm. If they can sell A shares, B shares, C shares, the customer is locked in, a fee to buy, a fee to sell, penalties for selling 'early' (annuities), and so on. You can avoid that by going to an investment company who sells no-load funds. provides guidance. Eg, they would discourage the purchase of junk.

quote:
To get to $20MM in the short term (not 20, 30 yrs....), in my opinion, the wealth needs to be created, not come from investments. I need to start another biz that will generate $500k-$1.5MM+ in net to myself per year and reinvest it. JMO.


Absolutely - turning a million into 20 million via capital appreciation (rather than value-added) is time dependent. A skilled person would start a business, build it up to $20M gross sales, then sell the company. And if there was real estate (a near-new factory, eg) retain the building, lease it back to the buyer for 6-figures per year. That cycle can sometimes be done in 10 or 15 years.

Where turning $1M into $20M via growth should always take 25 or 30yrs, any get-rich scheme to shorten the cycle will usually end in loss of principal.

Your plans depend on your personal situation - most of my money will go to grandkids (now young adults) and to great-grandkids. So I invest in longterm vehicles (I'm age 77, don't need new money, new income, got plenty). So our investments will be going to heirs 25, 35, 45 years out.
Post Sat Mar 26, 2016 4:48 pm
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MoneyMaker2016
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quote:
You can avoid that by going to an investment company who sells no-load funds. provides guidance. Eg, they would discourage the purchase of junk.


There was no load (front or back) on the purchases.

The brokerage does provide advice.

What I was asking is this -- you refer to the decisions I made as "junk" but I think you are saying they are terrible/awful options. I'm asking why?
Post Sat Mar 26, 2016 5:56 pm
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oldguy
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[/quote]PIMAX and NHMAX. Those are the two funds I'm in. I've been told lately they are complete junk

you refer to the decisions I made as "junk" but I think you are saying they are terrible/awful options. I'm asking why?
quote:


Pioneer trades in muni bonds that are issued by states, counties, municipalities, territories - they are classified as High Income bonds (in the industry vernacular, that is 'junk bonds'. Ie, high risk towns, counties, that are forced to pay 8% or 10% to borrow money, due to their poor credit rating. When these towns, etc fail and cannot make the city payroll, the bk court steps in and 'forgives' the loans, ie the high risk loans become low value. (Check their 10 year chart, goes anywhere from 6 to 11 - the 6 indicates that many of their bonds were failing in that era. ) If only a few of the individual bonds fail, the average of the fund carries them - but sometimes the muni failures are systemic, they all fail at once. The PIMAX is a Class A mutual fund, carries about a 5% sales fee, plus an annual 12b-1 fee embedded.

Nuveen is essentially more of the same - Class A w/ a 12b-1. High Income category.
In 2008 the return was -40%, in 2009 it was +42%. Those are huge fluctuations for ANY bond, even junk bonds. (And that was the AVERAGE of their bonds.) Their fund duration is about 11 years, that is looong. (I stay under 5 yrs with my bond portfolio).

My points? (1) high yield bonds are the opposite of your goal of safety and longterm, and (2) there is no need to buy Class A w/ 12b-1 costs when there are major companies that make their living in securities.


Post Sat Mar 26, 2016 7:08 pm
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MoneyMaker2016
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quote:
Originally posted by oldguy
Pioneer trades in muni bonds that are issued by states, counties, municipalities, territories - they are classified as High Income bonds (in the industry vernacular, that is 'junk bonds'. Ie, high risk towns, counties, that are forced to pay 8% or 10% to borrow money, due to their poor credit rating. When these towns, etc fail and cannot make the city payroll, the bk court steps in and 'forgives' the loans, ie the high risk loans become low value. (Check their 10 year chart, goes anywhere from 6 to 11 - the 6 indicates that many of their bonds were failing in that era. ) If only a few of the individual bonds fail, the average of the fund carries them - but sometimes the muni failures are systemic, they all fail at once. The PIMAX is a Class A mutual fund, carries about a 5% sales fee, plus an annual 12b-1 fee embedded.

Nuveen is essentially more of the same - Class A w/ a 12b-1. High Income category.
In 2008 the return was -40%, in 2009 it was +42%. Those are huge fluctuations for ANY bond, even junk bonds. (And that was the AVERAGE of their bonds.) Their fund duration is about 11 years, that is looong. (I stay under 5 yrs with my bond portfolio).

My points? (1) high yield bonds are the opposite of your goal of safety and longterm, and (2) there is no need to buy Class A w/ 12b-1 costs when there are major companies that make their living in securities.




A few things...
.
1) I don't know what 12b-1 costs are. But I assume they are built into the monthly dividend as a fund expense. That's how they get paid and I don't see the problem with it?

2) How exactly do you figure I am paying 5% sales fees? How am I paying them? Through the dividend? During the purchase or sale? I put in so much money at the initial purchase, I paid zero in sales fees and likewise will not zero when I get out (if that happens). Please advise.

3) Why do you say the high yield bonds are the opposite of safety and long term? Look at Nuveen for example: NHMAX. Had you purchased $1MM worth 16 years ago, you would have a net of $800K.

4) When you say "fail", you mean "default", right?

5) NHMAX has less than 1% default since inception. There's next to zero defaults and the ones that did went through a process where they paid back a very high percentage on the dollar.

6) Yes, in 2009 ALL high yield bonds took a nasty dip, but again, over the long term, it made no difference. Things evened out and if you held it you come out on top.

Correct me where I am wrong.
Post Sat Mar 26, 2016 8:02 pm
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oldguy
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quote:
Correct me where I am wrong.


OK
1. (googled) Mutual-fund investors paid about $9.5 billion last year in 12b-1 fees—and if you don't know what that is, you're not alone. The Securities and Exchange Commission worries that many people are unaware of or don't really understand these charges, which are subtracted from fund assets to pay for "distribution" and/or "services."

2. The 5% is a one-time fee sales fee that retailers charge at purchase, it is a part of the fund price. Pls advise? Don't be so trusting, just cuz you aren't able to find/identify the fees doesn't mean that they are not there.

3. Yes, $800k return. But most any stock index fund would have given you more. That $800k is about a 3.7%/yr return (combined yield and appreciation).

4 & 5. Yes - but it is a fund of many bonds - a few bond defaults won't do much harm, the risk is a sector failure in the muni industry.

6. (googled) In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade. These bonds have a higher risk of default or other adverse credit events, but typically pay higher yields than better quality bonds in order to make them attractive to investors. Sometimes the company can provide new bonds as a part of yield which can only be redeemed after its expiry or maturity.

But, again, your goals were safety, income - and avoid stocks. But you picked speculative low grade bonds (no safety there),with an income and yield pattern that essentially tracks stocks (your aversion). So do you reconcile that choice?
Post Sat Mar 26, 2016 10:17 pm
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MoneyMaker2016
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quote:
Originally posted by oldguy
quote:
Correct me where I am wrong.


OK
1. (googled) Mutual-fund investors paid about $9.5 billion last year in 12b-1 fees—and if you don't know what that is, you're not alone. The Securities and Exchange Commission worries that many people are unaware of or don't really understand these charges, which are subtracted from fund assets to pay for "distribution" and/or "services."

2. The 5% is a one-time fee sales fee that retailers charge at purchase, it is a part of the fund price. Pls advise? Don't be so trusting, just cuz you aren't able to find/identify the fees doesn't mean that they are not there.

3. Yes, $800k return. But most any stock index fund would have given you more. That $800k is about a 3.7%/yr return (combined yield and appreciation).

4 & 5. Yes - but it is a fund of many bonds - a few bond defaults won't do much harm, the risk is a sector failure in the muni industry.

6. (googled) In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade. These bonds have a higher risk of default or other adverse credit events, but typically pay higher yields than better quality bonds in order to make them attractive to investors. Sometimes the company can provide new bonds as a part of yield which can only be redeemed after its expiry or maturity.

But, again, your goals were safety, income - and avoid stocks. But you picked speculative low grade bonds (no safety there),with an income and yield pattern that essentially tracks stocks (your aversion). So do you reconcile that choice?


1 - Yes, then we are talking about the fees paid to the funds to manage the fund (I believe). Nothing I can do about this. I'm happy with the yield after two years of being in the fund. So I cannot complain.

2 - I will find out about this and report back.

3 - I understand other funds or investments MAY have given a higher return but I intend to earn my money and would be really happy with an $800k return on my investments over 16 yrs. I understand many people wouldn't say that. But I will also say that 90% would be very happy to receive $800k tax free dollars over a 16 year period (especially when they have no debt, and no mortgage).

4 & 5 - Understood. But can you show me an example over the last 15-30 yrs of this being a reality vs a theoretical thing?

6 - Understood. More risk, higher return (on the yield)

Two things then.

7 - What "would" have given me a better return over 16 yrs while also giving me a 4-6% tax free dividend each month? Specifically, how would the portfolio be set up and in what investments?

8 - When you say the funds "track" stocks, I assume you mean that as stocks go down, the NAV goes down and yield goes up? As the 30yr treasury increases, the NAV decreases and the yield will increase to an extent. As the NAV drops, my unrealized loss will increase, but its unrealized, as I collect dividends 20, 30 yrs out.
Post Sat Mar 26, 2016 10:48 pm
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oldguy
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quote:
Understood. But can you show me an example over the last 15-30 yrs of this being a reality vs a theoretical thing?


I recall one called Farmland Security. Kansas, in early 1990's. The holders were without their money for a couple years, but I think they got 75% or 80% back. I'm sure there are 100's of examples, but I don't follow them.

quote:
What "would" have given me a better return over 16 yrs while also giving me a 4-6% tax free dividend each month?


Don't know about setting up monthly divs, I let my funds reinvest. And when we want money, I sell something, usually every 6 months to a year - I'm over 70 1/2 so I have to take an RMD each year, most of that goes back into the same investment but in a different account.
But again, you're chasing "better return" and "low-risk" at the same time - that doesn't happen. It is either/or - if you want safety you need BB grade or better corporate bonds, gov't bonds, 5 yr or less duration - the combined yield/gain is about 2.5%/y to 3.5%/y.
If you want to dial up the risk level, skip the junk bonds and use a stock index fund, the longterm average return is about 11/yr. You'll pay taxes - but a taxable 11% nets way more than a tax-free 3.7%. Besides - you would be helping with the $17Tril national debt, where's your patriotism? lol
Post Sat Mar 26, 2016 11:47 pm
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