Awwww, lil “brainwash” got his feeling hurt =[
Good thing I didnt make fun of your cool Panda avatar, kiddo.
I’m glad the convexity point made you happy Systematic 
Holding individual bonds vs owning a bond fund can make a big difference. If people start pouring out of a bond fund or ETF then the bonds have to be sold to pay back the investors. However, you can hold your own bonds to maturity and won’t have to lose principal.
Ohai, I would definitely look into buying individuals as a first option. However, you want to try buying bigger lots if possible because you get better pricing (>$10,000 worth per bond). The only issue there is if you don’t have a lot to invest you’re making a diversification trade-off.
Regardless of individual bonds or a fund, just make sure to keep your maturity short. You’re using these to minimize taxes not generate big returns. Like bchad alludeded to: beef up the risk in your tax-deferred/free accounts instead.
I guess the point is that a fund with a target maturity and/or duration will have to sell bonds when interest rates rise and eat the capital loss, whereas the bond owner retains the option to hold to maturity. This will avoid the short-term paper loss, but of course they’ll be getting a lower yield than they otherwise would by buying newly issued bonds. Tough to say which is better (other than the avoidance of transaction costs) - presumably it depends on more specifics.
Laddered bond funds shouldn’t have this problem, though, since the maturing bonds pay and fund new bonds at the new (higher) yield, and don’t have to sell (unless they are mutual funds getting redeemed by others).
So if you are using a bond fund to make up the fixed income allocation of a portfolio, look for a laddered fund, or reduce your duration if you are expecting a rising interest rate environment.
Hmm ok. Thanks for the input. For me, problem with buying individual muni bonds is I don’t know much about this asset class - so I am not confident that I can do better than some passively managed fund. Plus, I don’t think I can sufficiently diversify given capital limitations. Maybe one day when I run a hedge fund, I will get my assistant numi to look into this idea.
In the mean time, I’m glad to be getting some seemingly useful info here. At least it gives me a starting point to do more research on my own.
Pandas are cute and cool. Have fun being extorted by your gf and her family or whatever you do when you go home. East Coast travelin’, I’m out.
Everyone’s in a super bad mood this week (myself included). Must be the stock market highs and the positive jobs report.
I agree, in theory, that buying individual munis is a fine way to go, especially if you’re holding to maturity. Definitely more fun. But, it requires a whole different DD process. If you’re equity minded, at least you can evaluate the credit risk of a corp bond. Munis are totally different. Plus there’s very little upside to getting it right vs what you’ll get with a fund. May as well pay a guy to do it for you and focus on something else. Chances are you’re not looking to knock it out of the park anyway. People buy munis to stay wealthy, not get wealthy.
And seriously, don’t go passive.
Edit: I’m in a good mood. I’ve been kicking more ass than usual this week.
I assume you are familiar with GO vs Rev munis and things of that sort, correct? At any rate, on a GO Muni Bond you are really just doing credit analysis on the issuer. Bloomberg Terminal has all the info you’d need. It doesn’t sound like you are trying to do anything exotic requiring lots of extra work, just get a rated muni with strong financials as a tax shelter.
Yep, apologies to those offended. I may have had too much coffee yesterday.
Numi is an onomonopia for muni, so he undoubtedly knows about them.
http://seekingalpha.com/article/1276591-muni-bond-cefs-take-a-beating-again
good article on muni cefs