“Safe Harbor Savings Accounts” — How to Sit Back and Become a Millionaire

By Travis Johnson, Stock Gumshoe, November 25, 2008

Does this ring a little bell for you? It might, if you’re a careful reader of every Gumshoe article (and why wouldn’t you be, really?). This ad is almost exacly the same as one that I wrote about back in October — an investment that is super safe, on the bargain rack, and, perhaps most exciting for folks, is not a stock.

Neither is it a “savings account,” of course. These “Safe Harbor Savings Accounts” are exactly the same thing as “Safe Harbor Investment Covenants.” I don’t know why they changed the fake name — perhaps “covenant” was too fancy a word to draw in the great investing unwashed, or maybe the connotation was too creepy when a newsletter edited by a guy named Christ was selling false “covenants.”

So, for your convenience, I’m republishing that note from last month below — and I think I changed all the “investment covenants” to “savings accounts” below, but I haven’t changed the article otherwise. If you’d rather read the original, you can click here to see it, along with the dozen or so insightful comments from fellow Gumshoe readers.

Today’s ad that will receive the Gumshoe treatment is for Steve Christ (no relation, I assume) and his Wealth Advisory newsletter … and yes, like so many others these days, it is focused on words like “safety” and “guaranteed.” Exactly the tonic that the panicked investor demands.

Now, this particular newsletter will only run you $79 a year, so you can go ahead and subscribe if you feel like it — as with so many of these “introductory” newsletters I assume they also use it as the target of constant upgrade offers for their more expensive services, but that doesn’t mean it isn’t any good.

But if you just want to figure out what a “safe harbor savings account” is, well, you’re in the right place — just read on, it won’t cost you anything.

First, let’s see how they “sell” this idea …

“I made an average of 28.2% profits without investing in a single stock… and by taking advantage of
tax-free investments that provide guaranteed return of principal.

“URGENT: In the next few moments, you’ll learn why it’s critical you use this tool – starting today – to safeguard your wealth from its two greatest threats: another market crash…and excessive taxation by the U.S. Government.”

It sounds pretty good, no? It gets better, just you wait …

“This powerful – but often overlooked – investment vehicle not only allows you to grow your wealth, but it also allows you to…

“Keep your money out of the U.S. Government’s hands by taking advantage of tax-free investments…
Earn both a steady stream of income AND a high rate of return…

“Rest easy with the knowledge that, in many cases, you’ll be taking advantage of investments where the principal is 100% guaranteed.”

So I know you’re asking, “where do I sign?” Give me a moment here, I’m just getting started!

Tongue firmly in cheek, one assumes, Steve tells us about the one “catch” …

” … in order to take advantage of this powerful investment vehicle, you must be willing to stay away from potentially dangerous investments like stocks or mutual funds.”


And he makes the point over and over that Warren Buffett, Bill Gross, and Wilbur Ross are all invested in these “savings accounts” — and if all those smart, rich guys do it, it must be good … no?

Lots of quotes from newspapers, too, to give this newsletter a little touch of their gravitas …

“The Wall Street Journal reported that ‘large investors are snapping up these investments.’

“‘Investing in (Safe Harbor Savings Accounts) is a no-brainer,’ according to the Washington Post.

“Forbes said that Safe Harbor Savings Accounts are ‘the non-volatile safe haven where investors can get a stable and reasonable return with little risk.’

“The Minneapolis Star-Tribune called Safe Harbor Savings Accounts ‘dependable and tax-free to boot,’ while the Milwaukee Journal Sentinel summed it up this way: ‘Amid the stock market’s turbulence… an island of calm.'”

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So what are we dealing with here?

You guessed it: Municipal Bonds.

Sounds a little less sexy than “safe harbor savings accounts,” doesn’t it?

Municipal bonds are a way for you to lend money to state and local governments, or to projects that are underwritten by those governments. They come in all different stripes, types, and sizes, and there are indeed plenty of very well-respected investment honchos who have been shouting about munis at the top of their lungs over the last few months.

I’m not particularly an expert in muni bonds, and have never invested in them myself, but I have looked into them from time to time. I even wrote about them early this year, when a different newsletter teased them as offering a “Virtual Florida Retirement” … so this is what I can tell you:

Municipal bonds are tax free at the federal level, and in some states that state’s bonds are also not taxed locally. This means that, all else being equal, a municipal bond should have a somewhat lower interest rate than a treasury bond, to compensate for that tax-advantaged status.

Of course, all things are not equal — and while it’s extremely rare for municipalities to default on their bonds, it’s also undeniably true that in a “flight to safety” trade as we’ve seen in recent months, the “absolutely safe” investment of treasury bonds is more valuable to investors than the “probably safe” municipal bond. So if you agree that municipal bonds are irrationally cheap these days, that’s why.

Steve Christ peppers his ad with lots of references to financial panic, including talk of bank closures, bankruptcies, and other crises — and while all those things may continue to come, do note that municipalities do not exist in a vacuum … if the country sees terrible times, so will many of our towns and cities. If the past holds true they’ll probably still pay their debts, but when someone talks about financial armageddon we shouldn’t necessarily allow them to convince us that city governments will avoid the bloodbath. On the other hand, if he’s correct in saying that we’ll see confiscatory taxation from the federal government in the years ahead, perhaps tax-advantaged municipal bonds will become relatively more appealing.

And there is at least one good example these days for the “probably safe” qualification — Jefferson County, Alabama, home to Birmingham, is sinking in debt thanks in part to some really bad deals with JP Morgan on a big bond issuance (and associated derivatives) that they used to pay for their new sewer system, and their debt is getting downgraded, and it’s possible they’ll go into bankruptcy.

Add that to the recent panics when it briefly looked like California and Massachusetts might have trouble refinancing their short term debt (they didn’t, in the end), and it’s easy to see why investors are worried about almost everything, even the good old muni, the old bastion of safety and tax-free income, beloved of retirees around the country.

As I hope I’ve made clear, I’m no bond expert — but if you look back 20 years at the good muni bonds, they’ve almost always traded at lower interest rates than treasury bonds. My guess would be that someday they will again trade at lower rates, if only because it seems like federal taxes are more likely to go up than down in the coming decades.

So what’s an individual to do? Well, probably most muni bonds are already held by individuals, and you can certainly go out and find bonds for your own state (or even city) in hopes of some extra tax advantage. It’s hard to build a diversified portfolio of bonds all on your lonesome, however, unless you’ve got buckets of money — and unless you’re close to retirement, you’re probably not thinking about having a large portion of your portfolio in muni bonds. Most of the big brokers, discount or otherwise, will sell muni bonds direct to investors, usually in $1,000 increments, and this area is probably well understood by most individual investment advisers and brokers, too, if you happen to choose that route.

There are a few ways to go the fund route with muni bonds — some of the big fund families offer municipal bond funds, and many of them even offer state-specific variations for the larger states that have a lot of retirees and where the tax advantage applies. Vanguard, for example, offers state-specific funds for California, Florida, New York, New Jersey, Ohio, Massachusetts and Pennsylvania, and most of the big families have similar offerings. Most of them have probably averaged returns of 4-6% a year over the last ten years, though returns have been lower lately because bond values have fallen (remember, the value of a traded bond goes down if the interest rates demanded by investors go up).

And there are also many, many closed end funds that invest primarily or exclusively in municipal bonds — and that may be the best bet now if you’re looking to take advantage of what you believe is a temporary mispricing of these bonds. That’s because most closed end funds are also trading at an unusually large discount to their net asset value right now, so if these investments come firmly back into favor they have the potential to snap back even stronger, since that discount should shrink.

Most of the closed-end funds that will probably look most appealing at first glance are leveraged funds, which means they borrow money to increase their potential returns. These usually have covenants that require them to maintain certain capital levels in order to keep paying dividends, so I’d pay attention to that if you’re interested in these funds — most of them that have relatively low leverage, like 10-25% or so, but if they’re leveraged at all, and in particular if they’re more heavily leveraged than that, it might be time to get a bit nervous.

Probably the easiest place to search for these kinds of funds is at the Closed End Fund Association website — the bond search is here, and you can make selections under “classifications” to choose what kind of bond funds you’re looking for, and whether you want a leveraged or unleveraged fund.

When you’re looking at bonds or bond funds, it is of course important to think a little bit about what you’re buying, or what’s in the portfolio. You’ll see high yield bonds in the municipal sector just as you’ll see high yield bonds in the corporate sector, and for the same reason: Some bonds are riskier than others. From what little I know, it seems that the “general obligation” bonds of states and cities are the least risky, since they’re just backed by the tax-collecting ability of that government and are generally in front of the line. Other bonds for long-lived infrastructure projects are often considered safe, too, though they may depend on income from those projects to pay back the interest, and it was bonds like this for a sewer project that appear to have caused such a crisis in Birmingham. States can “lend” their tax free status to other projects, too, in order to encourage development — like sports stadiums, etc., so those are not exactly the same as bonds that are backed by the full taxing ability of the state, city, or county government.

Most muni bonds are rated by one of the ratings agencies, using their own scale (meaning that even lower grade muni bonds may well be stronger than A-rated corporate bonds, for example). Most of them are rated awfully high, since the default risk is perceived to be very low, though it’s probably even more important now than ever to look at ratings with some skepticism. You could easily imagine, for example, that there are municipal bonds backing the extension of city services to subdivisions that are now filled with empty, foreclosed homes.

You can also find guarantees in this sector, including insured bonds (even though they’re backed by the bond insurers that everyone’s a bit afraid of, their problems generally came from the insured CDOs, not the insured munis), or municipal bonds that have been pre-refunded and that are backed by treasury bonds, but trade at significantly higher yields than treasuries — those last ones in particular are very much like free money, as long as you’re holding to maturity and don’t care about what could happen if all rates go up and you have to sell the bond. “Pre-refunded” bonds are those that the state has the money set aside to pay back, but they haven’t yet done so because the bonds haven’t hit their “callable” date — typically that money they plan to use to call back the bonds is held in treasuries, so in effect you get something akin to the safety of a treasury bond with a significantly higher interest rate and a tax benefit.

In the end, I can really only tell you that I know Steve Christ is hiding his muni bond idea behind the name “Safe Harbor Savings Accounts,” and that many other investment pundits are clearly pushing these bonds as generally offering great low-risk returns. And I know that there are many different levels of risk in this market, just as in other bonds, but that historically they have almost always been very safe. “Historically” is clearly not much of a salve for folks these days, but if you’re interested in tax-advantaged yields they’ve rarely been available at such a discounted price.



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November 25, 2008 3:12 pm

As always be careful. Just because Muni’s are not taxed at present doesn’t mean Obama won’t change the rules. And if inflation comes back with a roar in the next few years all bonds will loose value.

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john sloan
November 25, 2008 9:14 pm

HI Travis
amazing how these newsletter writers come up with the goofy names for perfectly simple investments. About 25 years ago I had my mother’s portfolio partially in Vanguard Calif munis – worked out well all things considering. But I wouldn’ pay anyone to tell me about how to do it.
As for changing the tax rules – these are non-taxable at federal level NOT as a favor for investors but for the municipalities and states – a matter of federalism and not wanting the USG to tax the debt of state entities. Plus of course if the interest on such bonds was taxed to holders the bonds would not be as salable without paying higher interest – result would be more need for the USG to subsidize the states – so no win.

Noting this topic as you did is a retread – I mentin that the AGORA folks are Again pushing their ‘Chaffee Royalty Program and claiming it is something brand new.
all the best
john sloan

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November 25, 2008 11:06 pm

Rather interesting, that the day this is written, I get a newsletter from Forbes Marilyn Cohen, with the following Subject Line: “Run, Don’t Walk, to Buy Munis”,,,
Gumshoe,,, You are right on TOP of it all~!
Eugene Young

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Myron Martin
Myron Martin
November 29, 2008 2:14 pm

TRAVIS TOUCHED ON IT, BUT, cities or states are no different than any other entity that contracts DEBT, (on which our monetary system is based) and when income or taxes DECLINE then they are in danger of default. There are NO ABSOLUTELY SAFE HAVENS in a debt based fiat money sytem!

They are only relative, i.e. the safest is perceived to be the Fedaral governments Treasuries in that they are the “lender of last resort” and if you read the fine print, “fiat money” is simply based on “government decree” i.e. faith in the credit of the government. Have you taken an objective look at their balance sheet lately, or considered their off balance sheet PROMISES like social security and health care?

Sure they can always PRINT more pretty paper with numbers on it and CALL it money but its intrinsic value is STILL ZERO, essentially a con game (based on faith in an I.O.U.) that when faith is lost, can only get you more of the same worthless paper. The Federal Reserve Act in effect LEGALIZES counterfeiting, creates a monopoly (private bankers creating our money out of thin air) and is in REALITY the mother of all Ponzi schemes a pyramid by definition. It requires the exponential borrowing of substitute money into existence that must be paid back with interest, (which the system never creates) therefore the pyramid can only continue to exist through exponential creation of debt in the form of new loans.

Could that EXPLAIN the fact that every level of government, most corporations, and particularly individuals are leveraged to the eyeballs with DEBT?

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is new jerssey a community property state

Is it new jerssey a community property state?any ideas?

John Muncie
July 26, 2009 7:32 am