If Municipal Bonds lose their ratings, field day for individual investor buying?

http://www.kiplinger.com/columns/balance...
Would they be safe to buy without the higher ratings? What ruin may ensue? (I'd like the primary focus to be on individual bonds vs bond funds)

It depends on why they lose their ratings. If they lose their ratings or are downgraded because they lose thier insrance, then you're looking at a lot of risk in the current economic environment. Many municipalities are experiencing serious revenue shortfalls and they expect the situation to get much worse before it gets better, so the risk of default is very real. If they lose their rating for some other reason, you still need to as why. But there are already plenty of unrated municipal bonds on the market and market forces have placed a presumably fair vale on these bonds, so you really don't need to take the risk of buying those that may lose their ratings in the near future.

Over half of municipal bonds are issued without a rating, which puts them in the high-yield category, whether they deserve it or not. This presents a good opportunity for professional traders that know the market and have the resources to do due diligence on the issuers. If they populate their portfolios with the right bonds they will earn a return that is disproportionate to the true risk of the bonds.

If you can afford to buy enough different bonds to be well diversified, buy general obligation bonds rather than revenue bonds, stay away from the areas of the country where state and local governments are currently looking at some serious revenue shortfalls, and buy what the pros are buying, you should be able to enjoy fairly high yields at a relatively low risk. Uninsured bonds will yield more but they're pretty risky right now. Of course, that risk varies with geography; some parts of the country still have a fairly vibrant economy providing tax revenue and others don't. This applies to bonds that were issued without a rating and to bonds that lose their rating.

The bottom line: Do your homework and diversify geographically.

hmmm

Actually, most munis are relatively safe. Some are not. Those may not actually be insured but who knows? It is kind of hard to believe anyone would have been foolish enough to insure junk mortgages much less buy them or even issue them. The main problem for the individual investor is having sufficient funds to purchase a diverse enough portfolio to minimize specific risk. The only muni bonds that I know of that recently went into default were airport revenue bonds backed by airline revenue. I am sure however that there are others. Hospital bonds have sometimes gone bust.

Generally, one would need to own a minimum of 20 different bonds to minimize specific risk. We are talking at a minimum investment of $100,000.