Which is better a Roth IRA or Muni Bonds?

Back in my stockbroker days, I had a client come in for financial advice for her IRA.  When I asked her what the IRA was invested in, she told me the friendly lady from the bank said a muni bond mutual fund was the best choice for her IRA.

I still groan and laugh at the same time when I think of that incident.  Sure, the yields might have been outperforming govt bonds and stocks at the time, but yield is only part of the equation.  How about risk, how much risk was she taking on by investing in those munis with large yields?

Today we are having similar issues.  A story in Investment News tells how people are willing to purchase almost anything, even buying Guamanian Munis, if they can get a high enough return.

Talk about short term thinking.  Yes, yields suck right now.  There is no getting around that issue.  However PIMCO, a giant size bond fund just made a giant size bet that inflation is going to kick in, which will increase yields.  Not only that, but chances are a number of city and state bond issuers are going to go bust. Just yesterday, the state of Pennsylvania had to bail out its capital, Harrisburg.

Some times it pays to do nothing, at least that way the money will be available in the future when rates inevitably start to increase again.