The Intelligent Investor: The Definitive Book On Value part 13. The purpose of this book is to supply, in a form suitable for laymen, guidance in the adoption and execution of an investment policy. Comparatively little will be said here about the technique of analyzing securities; attention will be paid chiefly to investment principles and investors’ attitudes. We shall, however, provide a number of condensed comparisons of specific securities - chiefly in pairs appearing side by side in the New York Stock Exchange list in order to bring home in concrete fashion the important elements involved in specific choices of common stocks | 106 Commentary on Chapter 4 THE INS AND OUTS OF INCOME INVESTING In Graham s day bond investors faced two basic choices Taxable or tax-free Short-term or long-term Today there is a third Bonds or bond funds Taxable or tax-free Unless you re in the lowest tax bracket 6 you should buy only tax-free municipal bonds outside your retirement accounts. Otherwise too much of your bond income will end up in the hands of the IRS. The only place to own taxable bonds is inside your 401 k or another sheltered account where you will owe no current tax on their income-and where municipal bonds have no place since their tax advantage goes to Short-term or long-term Bonds and interest rates teeter on opposite ends of a seesaw If interest rates rise bond prices fall-although a short-term bond falls far less than a long-term bond. On the other hand if interest rates fall bond prices rise-and a long-term bond will outperform shorter You can split the difference simply 6 For the 2003 tax year the bottom Federal tax bracket is for single people earning less than 28 400 or married people filing jointly earning less than 47 450. 7 Two good online calculators that will help you compare the after-tax income of municipal and taxable bonds can be found at . com cgi-bin and . To decide if a muni is right for you find the taxable equivalent yield generated by these calculators then compare that number to the yield currently available on Treasury bonds http markets bondcenter or markets . If the yield on Treasury bonds is higher than the taxable equivalent yield munis are not for you. In any case be warned that municipal bonds and funds produce lower income and more price fluctuation than most taxable bonds. Also the alternative minimum tax which now hits many middle-income Americans can negate the advantages of municipal bonds. 8 For an excellent introduction to bond
