A Look at Investing in Municipal Bonds

Posted on: 18 February 2020

The saying about being neither a borrower or a lender ranks as one of William Shakespeare's most famous quotes. While he's right in some ways, more than a few people and corporations disagree. They earned big borrowing and lending. How you go about things matters. Lending to a government, for example, could be workable. Facilitating loans to local or federal government institutions isn't complicated, either. Just buy a bond. How many do you buy and how much do you invest? Maybe it is wise to direct these questions to a financial advisor. Persons receiving large lump sum payments might find an advisor helpful.

Understand Bond Basics

A bond comes with a fixed rate of interest, and some pay more than others. A local municipality might issue a bond at a lower rate than a corporation, but a municipal bond may receive federal backing in case the bond issuer goes insolvent. With corporate bonds, the risk connects to the company's good or bad fortunes. The government won't bail their bond investors out. Understanding how different bonds work allows investors to improve their decision making with investment funds. When there's only "so much" money to invest, being extra careful makes sense.

The Hypothetical That May Become Reality

People become used to their normal year-to-year income range. However, someone can unexpectedly receive a significant sum of money. Perhaps a family cashes an insurance settlement or sells an inherited home or business. Investing the "found money" becomes a better plan than squandering it. How to invest the money, well, that's worth pondering. Risk commonly factors into decisions someone makes about investments, as people want to see a return on their investment. With lump-sum acquisitions, losses can't be easily replaced, if at all. The stock market represents one way to put money to work, but stocks and mutual rise and fall with the Dow Jones. Bonds come with less risk, although there may be less reward.

Hedging with Bonds

Many would-be investors look towards the stock market for significant growth. Yet, they might worry about risk, so they consider hedging. That is, they may choose less-risky investments to offset potential losses with the riskier ones. Bonds reflect common investment vehicles often chosen for hedging. Again, not all bonds are the same, though. One municipal bond may come with a higher rate of interest and potentially higher risk due. The municipality's current economic situation might not be stable. So, it may be prudent to think about any bond purchasing decisions carefully.

Contact services like Alan Z Appelbaum to learn more about tax-free bonds.