Every investor needs this asset in his portfolio...

Every investor needs this asset in his portfolio... What the 'junk-bond crisis' means for muni bonds... Get Doc Eifrig's advice delivered straight to your inbox every day with one click...

Editor's note: You may not have heard the news... but our colleague Dr. David "Doc" Eifrig recently launched a free e-letter, Retirement Millionaire Daily.

If you've been a Stansberry Research subscriber for long, you know Doc has been teaching his readers how to live a healthier, wealthier lifestyle for years now. His Retirement Millionaire, Retirement Trader, and Income Intelligence advisories regularly earn "A" ratings or better from Porter in the annual Report Card.

We normally charge hundreds – even thousands – of dollars every year for Doc's research. His Retirement Millionaire Daily e-letter is a way to receive a taste of his top advice on how to live a millionaire lifestyle at a fraction of the cost... various wealth-building strategies... and health tips – all for free.

Today's Digest features two recent essays from Retirement Millionaire Daily on one of Doc's favorite investment topics: municipal bonds. Longtime Digest readers know Doc has been one of the most outspoken bulls on "muni" bonds over the past several years.

While several so-called experts on Wall Street were predicting massive defaults in the muni market, Doc focused on the facts. He has showed his readers again and again that the "experts" were wrong... and those who followed his advice have earned safe double-digit gains, while collecting steady, tax-free income.

Now that Porter is warning of a serious crisisin the high-yield (or "junk") bond market, some readers are concerned about muni bonds again. Read on for Doc's latest thoughts on the matter...

We recently heard from a very nervous subscriber...

"What is happening with Invesco Value Municipal Trust (IIM)?" he wrote in an e-mail. "Doc Eifrig has been a proponent of this fund for several years. Since the first of November, the price has been rapidly sinking."

IIM is a fund that holds a portfolio of municipal bonds, which are extremely safe income-generating investments. If you subscribe to our Retirement Millionaire or Income Intelligence advisory services, you'll recognize IIM immediately. It's been one of our favorite vehicles for safe, steady income.

And for the last few years, it's been a wildly successful investment, especially considering how safe it is. Earlier this month, the Wall Street Journal published a piece called, "Municipal Bonds Shine in Bleak Landscape." The paper noted...

Municipal bonds sold by U.S. state and local governments are returning about 2% this year, according to Barclays PLC data, beating corporate bonds and many other supposedly higher-performing asset classes.

It is the second year of near market-leading returns from a sector typically prized for its low, steady performance. Muni bonds last year posted a total return of 9%, which comprises price appreciation and interest payments, approaching the S&P 500's total return of 14%.

Take a look at how this fund has been performing. The green circles represent specific times I've recommended the fund to subscribers. The red circle represents the decline that our reader is worried about...

A quick look at this chart should tell you that this decline is nothing to be concerned about.

If you are worried about it, I've got a simple way for you to become a more successful investor. It's one asset every great investor has, and it's nothing you can buy on E-Trade. The asset is this: reasonable expectations.

You determine what counts as "successful" for your investments. A lot of new investors need to set that bar at a level they can actually reach.

Many investors expect to earn untold riches in the market.

You need to make an honest assessment of what's possible. For instance, from 1926 to 2013, a portfolio that had 60% stocks and 40% bonds returned an average of 8.9% a year.

If you are expecting to earn a rate much higher than that... like 50% a year... you've set your sights way too high. In some cases, this can be harmless. But high expectations can lead investors to save too little for their futures. Also, inflated expectations for returns can lead investors to take on too much risk.

Rather than grow their portfolios quickly, they blow them up.

Investors with high expectations also expect every stock they own to rise constantly. That simply doesn't happen.

First, you'll have nearly as many stocks go down as go up. Even top investors would be satisfied with a win rate of 55% or 60% – especially if the gains are bigger than the losses.

Second, even your best bets won't march straight upward.

In 1989 and 1990, legendary investor Warren Buffett bought big stakes in Wells Fargo (WFC). Things did not work out well...

Rather than panic, Buffett held on. Now his shares of Wells Fargo are up about 4,000%.

Or, for another example: that 60% stocks/40% bonds portfolio we mentioned lost money in 21 out of 88 years, or 23% of the time.

If you expect your investments to return 20% a year with no losers and no down years, you will never be a successful investor. Your definition of success cannot be achieved.

To become successful, you have to embrace the fact that investments go up, and they most certainly go down.

With wise asset allocation and diversification – and an appreciation for the bumps in the road – you can earn returns that can lead to a comfortable retirement over time.

Your success starts with how you define it.

It could happen next week... or next month...

Wall Street is already sending warning signals about the next financial cataclysm. Analysts are using phrases like "liquidity crunch" and "crisis situation."

We're talking about the impending crisis in high-yield ("junk") corporate bonds. When this crisis happens, some investors will get wiped out... while others will make a killing...

But some folks are, right now, making a costly mistake by lumping municipal bonds into that same crisis.

Today, we'd like to explain municipal bonds... why they shouldn't be confused with high-yield "junk" bonds... and why they can be a sleep-well-at-night asset during a crisis.

What are municipal bonds?

Municipal bonds – or "munis" – are loans that investors make to cities and states to build roads, schools, or other public buildings. For example... toll roads in California, water distribution in Texas, and maintenance of the New Jersey Turnpike.

In return, the government promises to send investors regular interest payments, plus return the initial investment, called the "principal," at the end of a set period of time.

How much do munis pay you?

Right now, muni-bond funds are yielding about 5.5%. That seems pretty good at a time when savings accounts yield less than 1%. But the income is even better than it looks...

As an incentive to get folks to loan their money to cities and states, the income you earn from muni bonds is exempt from federal taxes. If you're in the 28% tax bracket, that makes a 5.5% yield the equivalent to a 7% taxable yield.

How often do you get paid?

Many municipal-bond funds are structured to pay out interest monthly... perfect for retirees who are looking for a safe, dependable income stream. Most muni funds have paid out like clockwork since they were established... every single month.

Are these bonds safe for your portfolio?

Muni bonds are incredibly safe... Most are backed by the full taxing power of the issuing municipality. If money runs short, the city or state can raise taxes and pay off its bills. That's what makes munis so safe.

From 1970 to 2013, an investment-grade municipal bond had a 0.08% chance of defaulting over 10 years. During that same period, junk bonds had about a 3% chance of defaulting over 10 years.

What's the worst-case scenario if everything falls apart?

We don't have to look far to find a prime example of nearly everything going wrong for muni-bond holders... In 2013, Detroit was a true nightmare scenario for muni bonds. The city had more than $20 million in debt that raising taxes wouldn't fix. After making deals with creditors, Detroit was able to exit bankruptcy in December 2014.

But even in this worst-case scenario, being a Detroit bondholder wasn't all that bad. If you held what were known as "unlimited-tax general-obligation" bonds – basically the all-purpose Detroit bonds – you collected $0.74 on the dollar in the final settlement.

So in the absolute worst-case scenario, most bondholders took just a 26% loss on face value... And remember, these bondholders also collected interest payments leading up to the city's default.

What if the Fed hikes interest rates?

Investors think that the Federal Reserve will raise its benchmark interest rate sometime this fall or early next year. Whenever that rate goes up, it will make other investments look less attractive in comparison.

Rates and prices move in opposite directions. If a bond pays 3% and rates rise to 5%, the price of the bond declines because investors can easily find higher-yielding investments than the original 3% bond.

But as far as we can calculate, most of the potential for higher rates has already been "priced in" to muni-bond prices.

Are muni bonds a good choice for you?

If you own mostly stocks, then buying bonds will help balance out some of the ups and downs of your portfolio. The prices of muni bonds usually move independently from stocks. And their consistent history of paying steady dividends can help you sleep at night.

But like all assets, you want to buy muni bonds at a good price...

When should you buy muni bonds?

Right now, muni bonds are trading cheap... near the depths of where they traded during the global financial crisis. And if you watch the headlines... or, better yet, are a subscriber of my Income Intelligence advisory service... you can use "headline risk" to figure out an even better time to buy.

If you see a big drop and scary headlines, it probably means a lot of investors are overreacting to a single event... like Detroit, Puerto Rico (which defaulted on $58 million in debt in August), or a liquidity crisis.

Where should you put muni bonds when you buy them?

Because most muni bonds are tax-advantaged... that is, you don't have to pay taxes on some or all of the distributions that they pay out... they make more sense to hold in a regular, taxable brokerage account instead of your 401(k) or IRA.

Why won't a junk-bond crisis hurt muni bonds?

Muni bonds may have rocky ups and downs in the near future, but we don't expect the same liquidity problems in munis that are likely in corporate bonds.

We've been telling readers to buy municipal bonds for a long time. I even went on national TV to make my case. Municipal bonds have been – and will continue to be – a great deal for income-seeking investors.

New 52-week highs (as of 11/27/15): American Financial (AFG), Prestige Brands (PBH), Public Storage (PSA), and Constellation Brands (STZ).

Regards,

Dr. David Eifrig Jr., MD, MBA
Baltimore, Maryland
November 30, 2015

Editor's note: To get more of Doc's "no-nonsense" advice on living your healthiest, wealthiest life – for FREE in your inbox each day – click here.

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