Ignore market volatility, maintain diversity, seek out high-quality bonds in low cost mutual funds, and stick to a buy-and-hold strategy regardless of market changes.
That's the advice to municipal bond investors from John C. Bogle, the investment guru, best-selling author and former chief executive officer of The Vanguard Group Inc.
Bogle, who created Vanguard in 1974 and served as senior chairman until 2000, said investors need to "stay the course" and remain focused on the concept of earning steady, tax-free income in the $3.7 trillion industry, which he regards as a key element in American capitalism and finance.
"Don't pay a lot of attention to the volatility in the market place," he said in an exclusive interview with The Bond Buyer Wednesday. "All these noises and jumping up and down along the way are really just emotions that confuse you."
He will speak on the importance of public finance issuance, his perspective of investing in mutual funds versus individual bonds, avoiding risk, curing the pension crisis and the direction of interest rates as keynote speaker on Monday at the 109th annual Government Finance Officers Association conference in Philadelphia.
He is scheduled to participate in a panel discussion with moderator Joe Mysak, editor of the daily Bloomberg Brief, in a question-and-answer format that includes audience participation with conference delegates, he said.
Philadelphia Mayor Michael Nutter is the keynote speaker on Tuesday and will speak about technology and innovation in his changing city, which ties into the theme of the conference: "Innovation and Resilience."
While Bogle said investors need to be resilient in their approach to municipal investing, he admitted to being a skeptic about innovations.
"There's usually a reason for innovations -- if it serves the municipal bond issuer or the muni bond shareholders," he said. "But, if it serves the municipal bond underwriters that's quite another thing."
Overall, he said the key objective for municipal bond investors is to stay focused on quality and to choose to diversify, preferably through a low-cost mutual fund.
"You won't be guessing on how a particular bond is going to be doing - but just buying and holding a diversified list of bonds for a stream of income that will last 15, 20, 30 years and that's pretty easy to do today in muni bond funds," he said.
Owning mutual funds, is one way to remove a lot of potential risk and volatility from investors' portfolios, according to Bogle, who is now president of the Bogle Financial Markets Research Center, which he established in 2000 and operates to support his work on behalf of investors.
Mutual funds allow investors to maintain high quality, earn monthly coupons, and own thousands of bonds in a maturity range that works best for their time frame and investment goals, he added. Vanguard was the first to pioneer mutual funds offered in short, intermediate and long range duration strategies back in 1977, Bogle said. They were also the firm's first three tax-exempt mutual funds.
The firm's Intermediate Tax-Exempt Bond Fund fits the bill in providing the best of both worlds -- an average A rating and no single holding is more than 1% of the fund, he said. It is one of 20 municipal bond mutual funds currently offered by Vanguard totaling approximately $150 billion, according to Bogle.
"It's not betting on a bond, it's betting on the bond market," with no volatility in cash flow or at maturity, he said. "You're really taking a pooled market risk when you own a thousand bonds and not the risk of an individual credit - whether it's a very good individual credit or whether it's a Puerto Rico."
Chasing higher yields by sacrificing credit quality could lead you to "wake up one coupon paying morning and run out to the mailbox and find there is no coupon there, no check," he said. "It's not a good idea to take a greater risk in the market itself. I don't like to touch higher risk securities. I stay with investment grade bonds."
Battered credits like Puerto Rico, Detroit and Chicago, he said, are too worrisome for the average, mom and pop or high net worth investor, and should be avoided.
"They are very high risk bonds and their yields reflect that, and there is certainly a question if they can meet their final obligations when their bonds mature," he said. "It's hard to see why they shouldn't be worried."
With interest rates poised to go up, he said one of the best ways to manage the potential fears is to avoid the long end of the market and be an investor.
"There are always financial buccaneers out there," he said. "As they are trading, they are focusing on the short term - sometimes on the very short term. An eighth here and 32nd there means money to these traders, but basically that's not the business most of us investors should be in," Bogle said.
Guessing at interest rates and trying to go long when rates are about to rise "is just, I think, a fool's game," Bogle said.
"You should take the interest rate that's available; when you're investing, invest regularly, and just enjoy the stream of income, and don't pay a lot of attention to the volatility in the market place," he said.
"Volatility is a short-term phenomenon," he said. "You have to adjust your behavior and say, 'I'm going to be a buy-and-hold investor, not a trading speculator.' "
