“It’s not what you look at that matters, it’s what you see.”
Henry David Thoreau
In a world that is filled with “the day’s hottest stock,” trading tools promising to make you millions and financial news and commentary aimed at appealing to one’s hope for “the easy road” it’s easy to become caught up in account balances and daily performance. When looking at an investment account statement many see a dollar figure and a resulting gain or loss for the period. The popular press and the typical financial advisor wants you to believe this is all that matters and it’s all you need to “see” when looking at your financial vitals- it’s easy to sell and easy to catch your attention with.
But what good is an “investment-only” focus if you don’t know how you will accomplish your goals? We’re firm believers that a truly comprehensive, constantly updated wealth plan must accompany investment statements as the tool needed to translate those numbers into what’s really important in your life. College education for kids, an early retirement, travel with kids and grandkids, the vacation property you’ve always wanted- these are the things you should see. These are the things that really matter. You’re life is bigger and more important than an account balance.
Our wealth planning division continues to work specifically to provide that perspective to our clients through wealth planning that translates the numbers and financial noise into actionable steps needed to accomplish financial dreams.
We’d like to share with you what we see in the municipal bond market. Historically, municipal bonds have been considered a very high quality investment. Over the past few months municipal bond prices have declined and interest rates have increased across all maturity ranges. The initial sell-off occurred in November and was due to an increase in Treasury interest rates. More recent weakness has been fueled by relentless negative media attention given to the potential for rising defaults. Investor nervousness about the potential for more defaults has led to massive redemptions of municipal bond funds, driving bond prices lower.
We believe many of the media reports and negative commentaries have greatly exaggerated the potential default risks. Yes, careful credit evaluation is more important than ever and challenges do exist in many states (California and Illinois) and cities (Vallejo, CA and Harrisburg, PA). However, in our opinion these examples represent localized problems, not systemic risks that will lead to wide-spread defaults across the entire municipal market.
Today, municipal bonds comprise a nearly $3 trillion market, which is made up of thousands of issuers in hundreds of healthy sub-markets. Most municipal debt is structured to be as immune as possible from economic swings, and many issuers have set aside rainy day funds to help them weather difficult economic cycles. On average, municipal debt service represents less than 10% of most state budgets. In the case of general obligation bonds, payments of interest and principal are backed by the full faith and credit (i.e. taxing power) of the issuer. It should also be noted that State governments cannot file for bankruptcy, cease to exist, reorganize, or be liquidated like a corporation. State governments have a requirement to balance their budgets each year. If budget shortfalls occur, then debt service payments carry a higher priority than other expenditures.
In our opinion the market is pricing in a higher level of defaults than will actually materialize. The recent rise in municipal bond interest rates and subsequent decline in their prices has created an opportunity for fixed income investors to buy quality securities at cheap prices, especially for those in higher income tax brackets.
Don’t let those that sell investments convince you that investment success is all that matters. Setting and achieving family goals with the help of a comprehensive, constantly updated wealth plan is just as important as any investment concept. Note that when considering investments, Payne Wealth Partners sees significant opportunity in the higher interest rates available in properly chosen municipal bond holdings due to a recent municipal bond sell-off.
Thank you for the trust and confidence you have placed in us. We value our relationship and the opportunity to help you secure your financial future.