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From Coast to Coast: How U.S. Muni Bonds Help Build the Nation

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Municipal Bonds Infographic

History of Municipal Bonds

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Over 200 Years of U.S. Municipal Bond History

Our modern society shares few characteristics with the 1800s. In the last two centuries, styles have changed, laws have evolved, and cities look entirely different. However, one thing that has prevailed is the way state and local governments finance public projects.

Far from a new invention, municipal bonds have been shaping U.S. communities for more than 200 years. In today’s infographic from New York Life Investments, we take a look back at their long history.

Early Beginnings – 1800s

1812: First Official Issue
New York City issues a general obligation bond for a canal.

1817-1825: Facilitating Economic Growth
A few years later, 42 separate bond issues help fund the successful Erie Canal project.

1843: Growing Popularity
Municipal debt sits at about $25 million. Over the next two decades, this total increases exponentially to fund urban improvement and free public education.

Circa 1865: Railroad Expansion
For a few years after the American Civil War, a great deal of debt is issued to build railroads.

1873: The Panic of 1873
Excessive investment in railroads, real estate, and nonessential services leads to the downfall of the large bank Jay Cooke and Co., smaller firms, and the stock market. Many state and local governments default, temporarily halting municipal financing.

The 20th Century

1913: Exception Granted
U.S. Congress introduces a permanent federal income tax, and specifically excludes municipal bond income from taxation.
Note: today, a portion of municipal bonds are taxable.

1930: Expansion in the West
In the midst of the Great Depression, voters approve $35 million in funding to build the Golden Gate Bridge.

1939-1945: Diverted Resources
With financial resources directed to the military in WWII, municipal debt falls. By 1945, total debt sits at less than $20 billion.

1960: Exponential Growth
Only 25 years later, outstanding public debt—the total amount owed to creditors—more than triples to $66 billion.

1971: Investor Protection
Municipal bond insurance is introduced. That same year, insured municipal bonds finance the construction of hospital facilities in Alaska—bringing essential services and investment opportunities to a remote area.

1975: Marketplace Stewardship
Bringing further reassurance to the municipal bond market, the Municipal Securities Rulemaking Board (MSRB) is introduced to establish regulations for dealers, and for advisors at a later date.

1981: Continued Growth
Outstanding public debt reaches $361 billion.

Modern Day

2009-2010: Economic Recovery
More than $181 billion of federally-subsidized Build America Bonds are issued by state and local governments to help stimulate the economy after the financial crisis.

2016-2018: Investor Dollars at Work
In recent years, state and local debt has financed many important projects across the country.

  • 2016: The New York State Thruway Authority issues $850 million in bonds to finance a portion of the new NY Bridge Project.
  • 2017: California’s Department of Water Resources issues $428 million in bonds for the maintenance and construction of its water management infrastructure.
  • 2018: The Denver International Airport issues $2.5B in bonds to finance capital improvements, the largest airport revenue bond in municipal bond history.

2018: Helping People and the Planet
Sustainable applications for municipal bonds continue to grow, with Californian voters approving $2 billion in financing for supportive housing. In addition, state and local governments issue $4.9 billion in U.S. municipal green bonds.

Today: A Sizable Investment Opportunity
As financing spans the nation, the U.S. municipal bond market is both large and active:

  • $3.8 trillion capital market
  • One million outstanding securities
  • $11.6 billion in par traded per/day
  • 40,000 daily trades

Not only that, municipals have offered a compelling after-tax yield. For example, high yield municipals offered 121% of the after-tax yield of high yield corporates as of September 30, 2019.

The Foundation of Infrastructure

For over 200 years, municipal bonds have provided critical financing to build hospitals, schools, highways, airports, and more. Today, two out of three infrastructure projects in the U.S. are financed by municipal bonds.

Additionally, municipals have weathered almost every economic storm, providing much-needed capital stimulus during some of the deepest U.S. recessions. As history continues to unfold, municipals hold great potential for issuers, communities, and investors.

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Infographics

What is Defined Outcome Investing?

Defined outcome investing is a customizable solution that investors of all mindsets can use to add a layer of predictability to their results.

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What is Defined Outcome Investing?

Equities can play a critical role in any investment portfolio thanks to their long-term growth potential. At the same time, this asset class can also present a number of challenges for investors.

Uncertainty around the short to mid-term performance of equities can be a major deterrent for some, while others may find it difficult to select the best stocks based on their unique needs. Fortunately, there is a solution that can help investors overcome these challenges. In today’s infographic from New York Life Investments, we introduce defined outcome investing, and examine how it can help individuals take more control over their equity investments.

Understanding How DOI Works

Defined outcome investing (DOI) is a family of strategies that add a layer of predictability to an investor’s results. This is achieved through two unique aspects.

The first is a customizable risk-return profile, which gives investors the option of receiving either upside enhancement or downside protection features.

Risk-Return FeatureHow it Works
Upside enhancementEnhances the returns of the specified index, up to a cap. The investor is not sheltered from negative returns.
Downside protectionProtects investors from negative returns, up to a certain amount. The investor still participates in market upside, up to a cap.

The second aspect is a predetermined time period—defined outcome strategies carry a maturity date, similar to a fixed income security. Upon reaching its maturity date, a defined outcome strategy expires and the proceeds are paid out to the investor. This feature makes it easier for an investor to time their equity exposures around personal liquidity needs.

To understand the potential of DOI, consider a woman who wishes to make a down payment on a property one year from now. She would like to invest and grow her money in the meantime, but is worried about market volatility. Rather than purchase individual securities or ETFs, she could opt for a defined outcome strategy with downside protection over a one year term.

These features would reduce the likelihood of negative returns over the year, while still giving her exposure to the growth potential of equities.

Types of Defined Outcome Strategies

Investors have three distinct types of defined outcome strategies to choose from, depending on their personal objectives.

Growth Strategies

Growth strategies are designed for investors who:

  • Have a positive outlook on markets
  • Seek high levels of capital appreciation
  • Accept the possibility of negative returns

As implied by their name, these strategies produce enhanced market returns. They do not, however, offer any downside protection. The table below demonstrates how a growth strategy with 50% upside enhancement would perform across a number of scenarios. Assume a maximum return cap of 36%.

Market ScenarioS&P 500 Return (via ETF)Growth Strategy Return Defined Outcome Result
Strongly Positive50%36%Investors reach their maximum return cap of 36%.
Positive20%30%Investors gain 10 percentage points over the index.
Modestly Positive8%12%Investors gain 4 percentage points over the index.
Negative-10%-10%Investors match the index's negative return.

Buffered Strategies

Buffered strategies are a more neutral solution designed for investors who:

  • Have a moderate outlook on markets
  • Seek capital appreciation
  • Require a safety buffer to mitigate losses

Buffered strategies allow investors to participate in equity markets while receiving a specified level of insulation from negative returns. The table below demonstrates how a buffered strategy with 20% loss insulation would perform across a number of scenarios. Assume a maximum return cap of 24%.

Market ScenarioS&P 500 Return (via ETF)Buffered Strategy ReturnDefined Outcome Result
Strongly Positive30%24%Investors reach their maximum return cap of 24%.
Positive8%8%Investors match the positive return of the index.
Negative-20%0%Investors are sheltered from losses within their buffer.
Strongly Negative-30%-10%Any losses beyond the buffer are realized by the investor.

Preservation Strategies

Preservation strategies are best suited for risk-averse investors who:

  • Have a negative outlook on markets
  • Want to manage downside risk
  • Have significant financial obligations in the near future

Preservation strategies provide a different type of downside protection where, instead of a buffer, investors define their maximum loss. The table below demonstrates how a preservation strategy with 95% capital preservation (5% maximum loss) would perform across a number of scenarios. Assume a maximum return cap of 20%.

Market Scenario S&P 500 Return (via ETF)Preservation StrategyDefined Outcome Result
Strongly Positive30%20%Investors reach their maximum return cap of 20%.
Positive8%8%Investors match the positive return of the index.
Negative-3%-3%Investors match negative returns within their maximum loss.
Strongly Negative-30%-5%Investors maintain 95% of their capital.

Accessing Defined Outcome Strategies

Defined outcome strategies are accessed through a vehicle known as a unit investment trust (UIT). UIT’s offer similar levels of transparency and accessibility when compared to ETFs or mutual funds, including daily liquidity and transparency of holdings. So how are they able to offer such compelling risk-return features?

The answer lies in their use of equity options, a type of derivative contract. Equity options give the holder, in this case the UIT, the option of buying (or selling) a stock at a predetermined price on a specific date in the future. These contracts are used to engineer the risk-return features previously described, and are the reason why defined outcome strategies carry a maturity date.

Thus, in order to realize the specified upside enhancement or downside protection features, an investor must hold the UIT for its entire term. While there is no penalty for redeeming a UIT early, the investor will not reach their defined outcome objective.

A More Predictable Approach to Investing

Equities are a powerful tool for long-term growth, but it can be difficult to build a properly-aligned portfolio according to one’s risk tolerance. This becomes especially relevant in today’s uncertain economic environment.

With customizable risk-return profiles and a defined maturity date, defined outcome investing is a powerful solution that can support a variety of financial goals through different phases of the market cycle. Whether its maximizing returns or saving for retirement, investors can now take greater control over their financial future.

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Infographics

Financial Wellness: How to Be Resilient During a Crisis

Even prior to COVID-19, only about 28% of U.S. adults were financially healthy. Here’s how you can improve your financial wellness during a crisis.

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financial wellness during crisis

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Financial Wellness: How to Be Resilient During a Crisis

Due to the COVID-19 pandemic, 90% of Americans feel anxious about money. These stress levels are the same across all income groups.

Unfortunately, financially-stressed people are more likely to face physical and mental health challenges. For example, people with high debt stress during the 2008 financial crisis had higher levels of back tension, severe depression, and anxiety.

In today’s infographic from New York Life Investments, we take a look at the current state of financial health, and highlight ways people can improve their financial wellness during a crisis.

A Current Snapshot

Financial health is the degree to which people are able to be resilient and take advantage of opportunities over time. It rests on eight indicators:

  • Spend: Spend less than income and pay bills on time
  • Save: Have sufficient liquid savings and long-term savings
  • Borrow: Have manageable debt and a prime credit score
  • Plan: Have appropriate insurance and plan ahead financially

Based on these factors, individuals fall along a spectrum of financial health. In the U.S., only about 28% of people were considered to be financially healthy in a 2019 study.

Clearly, many Americans were already facing challenging circumstances prior to the pandemic. Here are a couple of the top issues.

More Complexity

Finances have become more complicated over time.

For many years, workers could rely on defined benefit pension plans that paid a set amount in retirement. In recent decades, pensions have primarily shifted to defined contribution plans. These require the employee to make investment decisions and build their own nest egg.

Unfortunately, financial education has not kept pace with the rising need for knowledge. Fewer than half of U.S. states require high school students to take a course in personal finance.

“Money Talk” Taboo

To build financial literacy, individuals would benefit from talking more openly about money. However, 44% of Americans surveyed would rather talk about religion, death, or politics than discuss personal finance with a loved one.

Fears of embarrassment and conflict are major emotional roadblocks that hamper financial progress. What can individuals do to improve their financial wellness, especially during a crisis?

Building Resiliency

People can follow a step-by-step strategy to optimize their financial situation.

  1. Assess their current situation.

    Uncertainty can be a major source of anxiety. To identify the source of stress—and determine if it’s warranted—investors can take stock of their income, expenses, savings, and debts.

    Financial self-awareness is positively associated with greater financial satisfaction, and stronger spending and investing decisions.

  2. Prepare for the worst-case scenario.

    What can individuals do if they lose their job or see a prolonged drop in retirement savings?

    Investors can consider various options, such as taking on freelance work, cutting unnecessary expenses, or increasing retirement plan contributions. Then, they can “stress test” their financial plan to account for these scenarios and begin preparing as best they can.

  3. Break goals into small chunks.

    Specific, achievable, and measurable goals are easier to manage. For example, rather than having a goal to pay down $51,000 in debt, an individual could aim to make monthly payments of $850 over five years.

    By setting smaller goals, investors can take action to make progress. Research has shown that achieving quick wins makes people more likely to achieve their financial goals.

  4. Improve financial knowledge and openness.

    Investors can educate themselves as much as possible—people with high investment knowledge are proven to be more prepared and less anxious.

     Has planned for retirementFeels anxious when thinking about personal financesHas emergency savings
    Low Investment Knowledge62%48%78%
    High Investment Knowledge73%21%90%

    People can also take steps to break financial taboos with loved ones, by starting with simple conversations about experience and building to more concrete discussions about family finances. The ability to talk about money is one of the most important skills for building financial literacy.

  5. Create long-term, purposeful goals.

    Setting the right goals helps investors define their own parameters for success, which in turn keeps them focused and motivated. It’s also important to monitor goal progress regularly, to allow for portfolio or contribution adjustments as needed.

Taking Charge

Financial crises can strike at any point in time, whether it’s due to personal circumstances or an economic downturn.

To improve their situation, people can focus on the controllable elements of financial health: spending, saving, borrowing, and planning. This allows investors to emerge with a stronger, more resilient plan than they had before the crisis.

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