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But what about inflation?


In your interesting article, “Just How Smart is the ‘Intelligent Investor’?” you seem to avoid considering inflation. While it’s low now, historically, it can be quite high. Thus, a 4.00% real yield for a long-term bond can be eaten by inflation down to almost nothing or worse by the end of its term. In addition, though the risk of default is small, it is no longer as small as it was in the past. I’ve had several bonds default in whole or in part. In addition, if for any reason you need to sell the bonds and the interest rate has moved up, as it most likely will, you will lose capital. For those reasons, long-term-munis are not as attractive as you present them. But I bet you knew all that! I’ve been in and out of munis for more than 30 years.

G.H., California


James A. Klotz responds:

Thank you for your response. There seems to be a misunderstanding. Our article merely addressed a column in the Wall Street Journal that we found to be misleading. It was not intended to provide the pros and cons of muni investing.
Contrary to your thoughts, the default rate of municipal bonds is lower than it has ever been (approximately 1/2 of 1%), according to Moody’s.
We would be pleased to assist you in selecting your next bond purchase to help avoid the pitfalls you have encountered in the past.
As a 30-year bond investor, you are aware that there has not been a damaging period of inflation since 1982.
Keep in mind, inflation affects all investments and has been most egregious to cash on the sidelines waiting for interest rates to rise. The WSJ article casts an inappropriate dark cloud and a lack of understanding over tax-free muni investing.

Nov 12, 2015

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