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The Great Muni Default of 2011 that Never Was

Meredith Whitney, a banking analyst and head of the Meredith Whitney Advisory Group, created somewhat of a panic when she announced in December of 2010 on 60 minutes that there would be “hundreds of billions of dollars” of municipal bond defaults in the $3.7 trillion asset class over the coming year.

However, a funny thing happened over 2011; Muni bonds were actually one of the best performing asset classes returning 10.7%.  There were hardly any defaults that resulted in municipalities missing payments.  In fact, there were fewer missed payments than in 2010.  State and local governments saw revenue rebound, they increased taxes supporting the bonds, found ways to cut costs, and reduced their borrowing rate by 30% from 2010.

If a taxable investor had taken her advice and avoided this sector they would have missed out on superb performing asset class.  This is yet another reminder that even “experts” do not know what the future will hold.  While attempting to act in an effort to avoid losses is a compelling and natural instinct – when it comes to investing it is usually counterproductive and costly.  Investors continue to be best served by establishing a diversified asset allocation designed to meet their goals and to manage it to any changes in their individual circumstances. 

Index Performance                                     December      Quarter        YTD

US Stock (Russell 3000)                                    +0.82%           +12.12%        +1.03%
Foreign Stock (FTSE AW ex US)                      -1.15%              +3.68%        -13.55%
Total US Bond Mkt. (BarCap Aggregate)         +1.10%           +1.12%          +7.84%
Short US Gov. Bonds (BarCap Gov 1-5 Yr)      +0.18%          +0.42%          +3.21%
Municipal Bonds (BarCap 1-10yr Muni)           +1.51%          +1.83%          +6.02%
Cash (ML 3Month T-Bill)                                  -0.00%           +0.00%        +0.10%