Where the REALLY rich put their money.

The reason for this is fairly simple for owning municipal bonds, excellent returns approaching 5% annually in interest.  Solid safe return of principal when the bonds mature.   Lastly and most importantly the interest is tax free both state and federal no matter how much income the person has otherwise.   For some very high income investors that 5% interest would compute to over 8% taxable return.  The interest being tax free also keeps some of their other income from reaching the highest tax rate in some cases saving money there as well. 

So the really rich own  sometimes up to two thirds of their portfolios in municipal bonds. The stocks they own tend to be high growth or tax efficient stock funds where they purpose is not income, but rather keeping their assets up with inflation.  Most of the ultra wealthy people view corporate and US Treasury bonds as losers since the interest rates generally do not keep their net worth up with inflation and are highly taxable. 

Now how can you participate in owning a municipal bond portfolio.   If you have significant income the best way is to find a good broker who has a municipal bond portfolio and begin building a bond portfolio.  Individual bonds are sold in $5000 lots and are priced at $100 par more or less.  One can buy either General Obligation bonds which are backed by taxing authority of the issuer.  An example would be a school bond issued by a county.  The other segment are called Revenue Bonds.  They are backed by the authority to raise rates and secure revenue from a source such as an airport or an electric operating plant.  For many years GO's as they are called were considered the safest, but now they are not as strong due to the push back from other interests wanting their share of the tax pot, such as public unions.  Of late Revenue bonds have gained favor due to the ability of the issuer to raise fees to support the bonds.  One must be honest with themselves and know that unless you are have at least a $250k to invest in individual bonds that approach might not be the best choice.  

The other option is municipal bond funds.  These have more principal risk than individual bonds since they are subject to the market forces of higher interest rates eroding bond values.  Individual bonds have the option of being held until maturity date and regaining all principal.  We have suggested and continue to suggest NNC, a Nuveen Bond Fund, which offers about 4.8% interest paid monthly for residents of North Carolina.  NNC is selling below par value and can offer some capital gains as well.  Note NNC using some leverage to gain their higher payout. That leverage is borrowing some money on the cheap, paying the interest costs, and gaining the higher bond payout as a gain.  The good news is those same bonds are below par value as well.  There are similar funds out there for people who live in other states. 

So if you want to invest like the really rich consider some assets in municipal bonds. These assets are excellent for retired people looking to keep other income in lower tax brackets and gaining a higher return that US Treasuries with similar safety.  No one who has not first taken advantage of your company 401-k to the max and an individual Roth IRA should place money in other assets. 

We own NNC.