Inadequate (or just plain bad) Financial Advice From The Financial Media

In this case, Kiplinger’s Magazine.  Kiplinger’s is a nationally distributed and syndicated magazine, with what you’d think would be great authority, knowledge and research in the field of personal finance.  Surely they would not make any substandard investment recommendations, would they?

From their website:

10 Great Mutual Funds That Deliver High Income – Put more cash in your pocket and protection in your portfolio with these solid funds that pay good dividends and high interest.

After all we’ve suffered over the past decade, it’s easy to see why we’re flocking to the investment equivalent of comfort food. Heaps of supposedly super-safe Treasury bonds help us sleep at night after a diet of stocks left us stressed and hungry. And no wonder: The U.S. stock market has lost about 2% annualized over the past ten years, while Barclays Capital Aggregate Bond index, which measures high-quality bonds, gained a savory 6.5% a year (emphasis mine).

Wow, doesn’t that sound yummy, a 6.5% percent return per year for the past 10 years. Except that the Barclays Capital Aggregate Bond index ETF seems to have been around only since 5/23/2007, according to the screener tool on my Scottrade account, and to Google Finance, and to Yahoo Finance.  Perhaps I made an error in the search string, but perhaps not.  Anyway, possibe misleading factoid aside, let’s delve into the meat of the article.

The author (Mr. Bob Frick, senior editor), while cautioning the reader about the risks of the bond and stock market in general, goes on to recommend ten mutual bond funds, which will deliver superior returns.

Here’s one:

Saving on taxes
Over the past three years, the municipal-bond market has morphed from a relatively safe haven to what some see as an accident waiting to happen. A few years back, half of muni bonds were insured. Now, with the disintegration of the bond-insurance business, only about 10% of new munis come to market with that protection. On top of that, some observers suggest that we may see a wave of defaults as states and cities cope with falling revenues and enormous obligations for the pensions and health care of current and retired workers.

Mark Sommer, manager of Fidelity Intermediate Municipal IncomeFLTMX), says that the worries are overblown. He says that state and local governments can raise taxes to pay interest and that many of these bonds are tied to key services, such as water and sewer. “Such services are so essential that people won’t stop paying for them,” he says. Still, Sommer and his analysts carefully sift through thousands of bonds to find IOUs that will pay off even in this tough economic climate. They do a good job, as can be seen by Municipal Income’s ability to rank consistently near the top of its category (medium-maturity muni funds). The fund, a member of the Kiplinger 25, currently yields 2.5%. That’s the equivalent of 3.8% if you’re in the top 35% federal tax bracket. The fund’s average duration is 5 years.

Sometimes I’m left speechless by the sheer stupidity of statements made by people who should know better.Even though, EVEN THOUGH (!!), as the writer correctly reports that the whole muni universe could come crashing down, and muni bonds can’t even buy insurance, “the worries are overblown”, according to this fund manager genius. Sure, state and local governments can raise taxes, and raise fees on essential services that people won’t stop paying for.   Sure, and folks can vote with their feet and move out to a rural location in the countryside, or to another city, or to another state, just to get away from crushing taxation.  Don’t worry, it’s OK, this fund manager does a great job and ranks consistently high in Kiplinger’s ranking.


I did a quick run through on this fund through my Scottrade account’s research tools, which gives access to a report by Standard and Poor.  Some of the fund’s top 10 holdings are bonds from New York, California, Illinois, Los Angeles, and Florida, states and cities that by the author’s own writing owe “enormous obligations for the pensions and health care of current and retired workers.”

A couple of quick Google searches for “Illinois muni default” and “California muni default” yields these headlines:

Illinois: Higher Default Risk than Iceland  (Zero Hedge) Just how much trouble is Illinois in?  The State is looking at a two-year budget deficit going into FY2011 of at least $12.8 billion, according to a report issued by the Civic Federation’s Institute for Illinois Fiscal Sustainability in January of this year.  Its poor financial discipline and the lack of will to deal with budget issues prompted both Fitch and Moody’s to downgrade the State’s debt rating by one notch sending its credit default swap (CDS) to a record high.

Illinois Debt-Default Insurance Climbs to Record High (Bloomberg) June 17 (Bloomberg) — The cost of insuring Illinois bonds against default rose to a record high as state lawmakers confront a $13 billion budget gap for the year starting July 1.

Credit default swap deals unnerve California (Los Angeles Times)Some say credit default swaps may influence the market for muni bonds. August 19, 2010|By Nathaniel Popper, Los Angeles TimesReporting from New York — Is Wall Street profiting from California’s misery?

That’s been a concern of state Treasurer Bill Lockyer, who takes a dim view of financial instruments — known as credit default swaps — that enable speculators to bet against California’s ability to pay its debts.

Remember Kiplinger’s headline:  “10 Grrrreat Funds”.

Well, let’s be realistic, this is a major major personal finance publication.  Would it really counsel its readers to stay away from mutual fund companies that buy lots and lots of column inches of ad space?  Not likely…

No recommendations here, just some advice to take financial advice from the mainstream media with a large grain of salt.  For a homework assignment, look up the 10 year performances of $10,000 invested with each of these funds, and then compare that with the performance of a precious-metal fund like Toqueville Gold Fund.  You might be surprised.

If you agree or disagree, feel free to leave a comment.

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