In 2014, the most boring investment in the room became the life of the party.
We’re talking about municipal – or tax-free – bonds, those tried and true investments that your grandmother probably found a little dull even in her days.
But taxes have gone up, and interest rates have gone down. That’s two good reasons to rediscover municipal bonds, an old standby that can deliver safe and satisfying bond returns.
Muni bonds were “on a tear” in 2014, says the Wall Street Journal, earning returns in the high single digits, and beating out other type of bonds like corporates, high yield, and Treasury’s.
“These days, even the boring returns can be exciting,” says Michael Finke, Ph.D., professor of personal financial planning at Texas Tech University.
Municipal bonds are known for their tax-free returns, making them an excellent choice for higher-income taxpayers. They’re also recognized as very safe investments. We use them in clients’ non-retirement portfolios when higher taxes are an issue.
“Only about a half of 1% of municipal bonds defaulted in the United States during the latter half of the 20th century,” says Finke.
Still, it’s a good idea to diversify your municipal bond holdings by owning bonds from several different states, or use a professionally managed municipal bond fund for expert credit selection. While muni bonds are generally very safe, it’s important to sidestep potential landmines while still locking in a decent return.