Free money is waiting for you

I’m talking about the Municipal Bonds (called Muni) a few times and you can check here for more details. As I said, Muni is one area that people often have a lot of confusion and as the result, they often panic to run from time to time due to overreacting to some headline news. This is oftentimes creating a great opportunity for those who understand the Muni and have the gut to step in during “crisis”. I even call this free money to be made.  Right now at the moment, we are seeing this kind of free money floating around for you to pick if you dare. Let me explain……

These days, one of the hot topics in the headlines is about Puerto Rico (PR), a Commonwealth state in the USA. For those who understand the situation, PR, a beautiful island state, is hopelessly insolvent. Just like Detroit, it has mismanaged its finance for years and incurred a huge debt load worth over $70 Billion now. Given the State has not much economic activities that can generate sustainable revenue for it, there is virtually no hope for it to pay the debt. It is inevitable that PR, following the footsteps of Detroit, will bankrupt soon. When people investing in Muni’s saw this news, they got panic and sold amass anything related to Muni’s. This is a typical stupidity of general investors overreacting to headlines news. You see, the Muni is a huge market worth over $3 Trillion. Historically the bankruptcy rate is less than 1% among all the Muni bonds issued by the states. Yes, if you only invest in the Muni’s of certain states, especially if you are chasing for high yield that is always associated with high risk, you may run into a huge risk of losing all your money. But if you are wise enough to only buy the Muni ETFs which will have a mixture of many different municipal bonds from different states, the chance of losing all you money is virtually nil. For closed-end Muni EFTs, you want to buy when they are trading below their NAV (net asset value). This way, you cast a stone for two birds: you will earn money when the ETF return to their NAV, which will almost always happen when the market calms down; in addition, you will also earn a higher interest income that is tax-free. To me the combo of the two is really a kind of free money for you to pick.

Right now, you can buy the Nuveen Municipal Opportunity Fund (NIO) for a 10% discount to its NAV and it has a tax-equivalent yield of 10%. Don’t miss the free money!