THIS IS NOT INVESTMENT ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Like many similarly situated Americans, I have continued to add to my municipal bond portfolio as a hedge against the possibility of increased marginal tax rates should the Bush tax cuts not be extended. I like closed end funds (CEF) for this (e.g. EIM, NMO, etc.) because of their liquidity (trade on NYSE), their use of leverage in this time of low interest rates, their frequent distributions and their large diversity of holdings. Until recently this approach has had an additional benefit of principal appreciation, although that has not been the objective. This week, however, concern over the Republican response to strained state and local finances, California's continuing budget problems and several stories about the insolvency of Manitowoc, WI and Harrisburg, PA in the WSJ have caused all municipal bonds to plummet. My holdings are now approaching my 8% loss limit, and I am at a cross roads.
My continuous due diligence reveals that the underlying holdings of each CEF (which one can track quarterly) are secure. Most are investment grade, have some but not undue exposure to California (and then not to the state but to AA or better municipalities), many are insured (cold comfort these days); in short, they are no worse off than when I bought them. Do I follow my rules punctiliously and exit if they pass the 8% line or do I cost average the loss by doubling down? I am living the moment of truth---risk/reward, the very situation which prompted the title of this publication. Shares purchased now would pay 7.3% tax advantaged, which is equivalent to a taxable return of 11%. What to do?
Compromise. The bleeding seems to have stopped on Friday. If my holdings stabilize for a few days or gain, I will add to the position. No risk, no reward---but let's not be foolish. These questions present daily, but rarely so starkly or so elegantly.
Manitowoc, WI and Harrisburg, PA in the WSJ have caused all municipal bonds to plummet. My holdings are now approaching my 8% loss limit, and I am at a cross roads.
My continuous due diligence reveals that the underlying holdings of each CEF (which one can track quarterly) are secure. Most are investment grade, have some but not undue exposure to California (and then not to the state but to AA or better municipalities), many are insured (cold comfort these days); in short, they are no worse off than when I bought them. Do I follow my rules punctiliously and exit if they pass the 8% line or do I cost average the loss by doubling down? I am living the moment of truth---risk/reward, the very situation which prompted the title of this publication. Shares purchased now would pay 7.3% tax advantaged, which is equivalent to a taxable return of 11%. What to do?
Compromise. The bleeding seems to have stopped on Friday. If my holdings stabilize for a few days or gain, I will add to the position. No risk, no reward---but let's not be foolish. These questions present daily, but rarely so starkly or so elegantly.
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