You can get a coupon of 3% to 4% on high-quality municipal bonds. Unless you are in a low tax bracket, you should probably have some of these things in your portfolio. After taxes, the yield is way ahead of what you get on a U.S. Treasury.
Tax-exempt bonds are not without risk. They get savaged by rising interest rates, just as Treasury bonds do. They have, in addition, a palpable risk of default. I�ll come back to that matter in a moment. But first let�s address the question of how to own these bonds.
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Buy Direct and Save?
One way to get in is to buy munis directly. That makes sense if (a) you buy newly issued bonds, paying the same price as institutional buyers; (b) you are highly confident you won�t need to sell before the bonds mature; (c) you have hours and hours of time to research the bonds; and (d) you have so much money that you can build a richly diversified portfolio with $100,000+ in each position.
Does this describe you? If so, you are some kind of freak.
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The No-Load Approach
Ordinary investors should proceed to method two. That is to invest in a no-load municipal bond fund.
My favorite muni fund is the Vanguard Long-Term Tax-Exempt fund. It owns 889 bonds with an average time to maturity of seven years. It yields 4% at the moment; payouts will drift down to 3% as some older high-coupon bonds get paid off and replaced with lower-coupon bonds (Ben Bernanke at work).
What a no-load fund gives you, besides professional management, is liquidity. Connect your fund account to your bank and you can, with a few mouse clicks, turn your tax-exempt investment into cash in 24 hours.
If you own muni bonds directly and need some ready cash you will have to sell in the secondary market, at whatever bid price a middleman deigns to offer. You will be hosed.
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