Some people are so avid about avoiding taxes that they make big mistakes with their portfolios.
“I’m worried about the New Jersey municipal bonds that my father bought. I got them when he died in 2015.
Since a mid-December peak, the prices of long-term New Jersey tax-exempts have fallen not quite 10%, to judge from the asset value of the Vanguard New Jersey Long-Term Tax-Exempt Fund. There is no way for you to predict where the prices will go next. In the Vanguard New Jersey fund, Morningstar calculates, the average bond sports a 4.3% coupon and is priced at 113, or $1.13 per dollar of par value. When the bond is redeemed, you’re out the 13 cents. The true yield, allowing for erosion of principal, is scarcely half that 4.3%.
Console yourself that, in being fixated on state income taxes, you have plenty of company. Vanguard offers its low-cost single-state muni funds only for the bigger states. Elsewhere, tax-panicked investors flock into expensive single-state funds sold by lesser fund companies. They are saving at best a quarter of a percentage point in taxes but incurring mutual fund expenses of double or triple that amount. What a waste.
With corporate or municipal debt, though, you’ve got a problem. Diversification is imperative. You don’t want your life savings invested in the next Kmart or Detroit. Trading costs are very stiff, partly because there are tens of thousands of issues, each with peculiarities of credit quality and repayment terms.
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