Millennial investors stand to gain from sheltering disposable income in bonds given that state and local taxes are no longer deductible from federal tax returns under the revised tax code.
The Tax Cuts and Jobs Act of 2017, was signed by President Donald Trump with the expectation of boosting economic growth through reduced tax rates and simplifying the tax code. The law also retains tax-exempt status for private activity bonds (PABs).
“Initially poised to lose their tax-exempt status, PABs make up a lot of the high-yield market and comprise 30 percent of the overall municipal market,” says Adam Weigold, vice president of Eaton Vance Management and senior portfolio manager on Eaton Vance’s municipal bond team.
How Private Activity Bonds Benefit the Trump Administration
PABs are in the category of municipal bonds, typically used to pay for public projects. They’re particularly attractive now because they will potentially be used to finance President Trump’s proposed $1 trillion infrastructure plan.
During the 2016 campaign, Trump first promised to improve the condition of the nation’s roads, bridges, airports, and other public works. “The Trump administration may be interested in enhancing the ability to issue private activity bonds if they want an infrastructure bill to be successful,” Weigold says.
How Private Activity Bonds Benefit Investors
Although most millennials will likely want to invest in stocks, which provide the longest-term growth potential, bonds can be used to diversify and balance a portfolio.
“If there are shorter-term goals, such as a home down payment or a super emergency fund, then bonds have a place,” says Jakob Loescher, a certified financial planner for Savant Capital Management in Rockford, Illinois.
Security vs. Profitability
Since 1926, the average annual return for large capitalization common stocks is 10.2 percent, according to the Ibbotson Yearbook. Government and corporate bonds return 6 percent, while cash is 3 percent. The same study shows that the volatility of equities is much higher than that of bonds.
“When it comes to building wealth, one can either sleep well or eat well,” says Robert R. Johnson, president and CEO of the American College of Financial Services. “Investing conservatively allows one to sleep well, as there isn’t much volatility.”
Although bonds are considered a conservative investment, it’s their redemption that keeps investors coming back upon maturity. As such, investors of all walks can benefit from purchasing low-risk investments, particularly private activity bonds, as they can provide a necessary counterweight to the more volatile components of your portfolio.
Plus, considering they’ve retained their tax-exempt status, now may be a good time to add a nice municipal balance to your asset holdings.