Ian Weinberg, CFP and CEO at Family Wealth & Pension Management, says young investors should look at index funds or bond funds rather than investing directly in munis.

Video Transcript

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- Welcome back. Interest rates may still be low, but what role could municipal bonds play in your portfolio next year. We have Ian Weinberg, certified financial planner and Family Wealth and Pension Management CEO here to discuss. Ian, thank you so much for joining us. Talk to us about your outlook for municipal bonds next year because we're likely going to be in a rising rate environment. How are these going to benefit from that, and what types of investors should be looking at municipal bonds to add to their portfolio?

IAN WEINBERG: Sure. Thanks for having me. It's nice to be here. With respect to municipal bonds, I think that investors need to look at what these bonds do. One is they avoid tax. Two is they provide cash flow. They can provide income steady. Three is they can provide some level of safety if a portfolio is built properly and very well researched and very well diversified.

The fourth thing that's pretty cool about municipal bonds today is if we are looking at legislation that will increase over time where taxes are going to increase, income tax rates, municipal bonds have a little bit of a built in inflation hedge if we're going to see some change in the higher tax brackets. With that said, younger investors I think it would be harder for them to be that focused on the municipal bond arena, but it has its place in most people's portfolios.

ADAM SHAPIRO: Let's talk to the people in their late 40s and 50s. If you got the 401k, I think the average amount for that age group is anywhere from $150 to $250,000. If your 401k fund has a municipal bond fund offering within it, is that something someone should be looking at now or is that the kind of thing once you're transitioning out of your work years that you then use the 401k funds to purchase the bonds?

IAN WEINBERG: Yeah so, Adam, you're right. It's really not something you would use in your retirement plan. You would look to begin building a municipal bond portfolio outside of your retirement plan, so you get your tax benefits on that money. You're already getting tax benefits on 401k money because the money is growing inside the plan. With municipal bonds, it's after tax money that you've saved or you're saving that you would then begin to build some kind of municipal bond portfolio with that you would hope would kick off tax free income for you later on when you're planning on retiring.

So if you're in your 40s, and you've got a good 10 to 15 years to build up a bond portfolio, it's not a bad idea. And if you're going to be saving each year as time goes by above and beyond your 401k and you can save some money into municipal bonds, you'll be averaging into a bond market who's got historically very low yields. So it's not a bad thing to look at over time as you start to plan your allocations and look at when you might retire. One day, if you've built up a good amount of municipal bond interest when you retire, you're going to keep your tax bracket relatively low. It's going to be a good place to start.

- And for those investors in say their 20s or early 30s what 5% allocation of a portfolio do you think should go to municipal bonds and how would you convince younger investors who are perhaps looking at the S&P 500 almost 26% increase so far this year to go into this space instead?

IAN WEINBERG: So it's a great question, and I wouldn't. I wouldn't look for younger investors that are finding their sea legs with, let's say, maxing out retirement plans, and then saving some money, let's say, like you said in S&P 500 index funds. I think they have too much time before they retire to go to the bond market. They have a lot of time to let their capital grow they should be aggressive in nature. Not aggressive like day trading, but aggressive in the investment allocation, meaning mostly equities at this early age.

So I would say that the younger set munis are, if you've got a tax bracket problem in your 30s because you've had a startup that got sold. You made a lot of money on company stock. You want to stop working and you need cash flow. You've made $100 million in crypto. OK, then muni bonds are apropo. For the younger set--

ADAM SHAPIRO: Ian, not all muni bonds are created the same. I mean, there's risk that comes with muni bonds. I mean it's much less risk than buying high yield you corporate bonds. But I keep thinking of the Puerto Rico example. But there are cases where muni bonds default.

IAN WEINBERG: There are. So for the younger set, for the beginners, you start to use either muni bond index funds or muni bond funds. This way the portfolio is built for you. You don't have to manage your credits. You don't have to worry about an instance like Puerto Rico or Detroit. Most municipal bond funds have thousands of bonds in the portfolio, and it's the manager's responsibility to keep up on the credits. So I agree with you, Matt-- Adam, I apologize. I agree that it's definitely not for a rookie investor, and it's better to let the institutional managers take care of those bonds for you.

- All right, we'll leave it there for now. Ian Weinberg certified financial planner and Family Wealth and Pension Management CEO. Thank you so much for your time this afternoon. Have a happy holidays.