Time For California Muni Investors To Take A Stand
June 30, 2009
Enough is enough. I’ve had it with
Despite the relative safety of holding the state’s debt in the form of index funds or ETFs, when a government starts paying for prison services and laundry bills in the form of IOUs …
Don’t get me wrong. It’s not time to panic and completely bail on the state’s bond issues. If you’ve held onto them up to this point, jumping out all the way might not be the best idea. After all, long-term returns of conservatively run, ultralow-cost mutual funds like the Vanguard California Intermediate-Term Tax-Exempt Fund (VCAIX) are stellar.
The story is similar with ETFs. (We took a look at the muni bond ETF field last year in this column).
But in the past three months, while AGG has held its own during a rally in stocks, CMF has faltered. Its total returns are negative for the period, underscoring how quickly conditions have changed. Sentiment has been on a roller coaster this year toward
A few weeks ago I wrote a bullish comment over at Bogleheads supporting the view that it was highly unlikely the state would go bankrupt. ETFs like CMF and the SPDR Barclays Capital California Municipal Bond ETF (NYSEArca: CXA) track benchmarks steeped in high-quality bonds that are guaranteed by the state’s general obligation fund. California Treasurer Bill Lockyer has said that only “thermonuclear war” could halt payments of bonds with such backing.
Still, is there anyone out there investing in
And now, the state is issuing IOUs to even the most common of creditors? Think about that for a bit. I’m Joe Blow and I own a small landscaping service. It’s tough times, but I’ve managed to win a bidding war for a state contract to take care of a bunch of state office sites. I keep my costs lean and even though the price given to the state was very low, there’s a bit of profit to help with cash flow. Now, I’m getting paid with IOUs?
Besides the absurdity of the situation, what’s going on with
I’m not a Democrat or a Republican, so don’t think this rant is political in nature. But there’s a fine line between being a prudent investor and remaining true to your basic reasons for putting money into bonds. I’m in the accumulation phase of my investing life, where bonds are around to smooth my family portfolio’s bumps in a supposedly more volatile stock market. Is 2-3% more in tax-protected yields worth staying invested in a state that the Wall Street Journal recently observed has become ungovernable? (And that was in a front-page news story, not an opinion piece.)
So while I’m not bailing out completely from my
But shifting part of my allocation away from
For me, the expansion of ETFs and index funds into more and more parts of fixed-income markets is turning out to be more of a democratizing investment process than I ever imagined. Holding onto some
But it sure feels good not to be quite so beholden to the whims and fancies of our elected leaders in