Are you thinking of investing in municipal bonds?

If so, you may have good reason, particularly if you are in one of the higher tax brackets. After all, municipal bond interest payments typically are exempt from federal income taxes, and possibly state and local income taxes — although some “munis” are subject to the alternative minimum tax.

However, since not all municipal bonds are the same, you’ll want to know the differences — especially in terms of risk.

Municipal bonds, like corporate bonds, essentially face two types of risk: interest rate risk and default risk. Interest rate risk becomes clear when market interest rates rise, causing the value of your existing municipal bonds to fall. No one will pay you full price for your bonds when newly issued bonds carry a higher rate — so if you plan on selling bonds before they mature, you risk losing principal. You can largely ignore this type of risk simply by holding your bonds until maturity, at which point you will receive the face value back, provided the issuer doesn’t default.

And that brings us to the second type of risk: default risk. Historically, municipal bond default rates have been much lower than those of corporate bonds, particularly lower-quality bonds. But different types of municipal bonds carry different levels of default risk. Here’s a quick look at the two main categories of municipals and their risk characteristics:

• General obligation bonds: General obligation bonds generally finance projects of a municipality. A general obligation bond issuer is required to do everything in its power, including raising new taxes, to ensure that interest payments are paid on time and in full. This requirement helps support the creditworthiness of general obligation bonds.

• Revenue bonds: Revenue bonds, which finance schools, hospitals, utilities, airports, affordable housing and other public works, are paid by dedicated streams of revenue.

For example, revenues generated by the sewer system pay the interest on a sewer system revenue bond. Because revenue bonds have more restricted revenue streams than general obligation bonds, they are generally viewed to be riskier. To compensate for the added risk, revenue bonds usually pay a higher rate of interest than general obligation bonds.

When studying revenue bonds' risk factors, you also have to consider the type of revenue bond involved. For example, some sectors, such as housing and health care, may be more volatile, as are some industrial revenue bonds. (These bonds — generally used to support a specific project, such as a new manufacturing facility — are sponsored by a government entity, but proceeds go to a private, for-profit business.)

Of course, when evaluating the risk potential of municipal bonds, you don’t have to rely on guesswork. Major bond rating agencies — Standard & Poor’s, Moody’s and Fitch — review municipal bonds to determine their creditworthiness. There are no guarantees, but by sticking with “investment grade" bonds, you can help reduce the risk of owning a bond that goes into default.

Municipal bonds can be valuable additions to your portfolio. Besides providing income that’s free of federal taxes, these bonds offer a chance to help support valuable projects in your community. But, as we’ve seen, different “munis” have certain risk factors — so ensure you know exactly what type of bond you’re purchasing before you write the check.

Joe Faulk is a Crestview financial adviser.

This article originally appeared on Crestview News Bulletin: FINANCIAL FOCUS: Watch for different risk levels of 'muni' bonds

Next week, we observe Labor Day, a federal holiday since 1894 that celebrates American workers' achievements.

But to make progress toward your long-term financial goals, you need to do more than just earn money — you need to invest it wisely. 

That takes work, too.

Fortunately, there’s no real mystery to the types of labor in which you’ll need to engage to become a good investor.

Here are a few suggestions:

• Work to make investing a priority. Many people delay investing until they “have a better handle” on their finances. But these good intentions frequently go unfulfilled because there will always be something else on which to spend one’s money.

To work toward your important goals, such as a comfortable retirement or a child's education, put away some money regularly. If you’re just starting out in your career, you might not be able to afford much, but even a small amount can help. And when your salary increases, so can your investment contributions.

To make it easier, consider arranging for your bank to automatically move money each month from your checking or savings account into an investment account.

• Work to understand what’s in your portfolio. Some investors aren’t certain about what investments they own — and this uncertainty can lead to poor decision-making if it becomes necessary to make changes. So make sure you know what’s in your portfolio — and why.

• Work to keep your portfolio current with your goals. Even if you know why you initially purchased certain investments and how they fit into your portfolio, you can’t put things on “autopilot.” Over time, your goals may evolve, which means you’ll need to be vigilant in working with your financial advisor to adjust your portfolio accordingly.

• Work to diversify your holdings. No matter where you are in life, you will still need to diversify your portfolio by owning a variety of investments — stocks, bonds, government securities and other vehicles. Consequently, you’ll need to review your portfolio regularly to ensure that it’s still properly diversified. Diversification is a strategy designed to help reduce the effects of volatility on your holdings, but keep in mind that even a diversified portfolio can’t guarantee profits or protect against loss.

• Work to maintain a long-term perspective. No matter what you might hear from anyone else, there’s no “shortcut” to investment success. Many people hope they will “hit” on that one investment that will make them rich quickly — but that’s pretty much a fantasy. To help achieve your goals, you will need to invest for many years, through good markets and bad. And during those inevitable downturns, you’ll need to focus on your long-term objectives and follow a consistent investment strategy, making only those adjustments that make sense for your situation.

You’ll need to work on many aspects of investing to stay on the road toward success. But you don’t have to work alone: Investing can be complex, so you may want to get help from a financial professional — someone who knows both the investment world and your individual needs, goals and risk tolerance.

Joe Faulk is a Crestview financial adviser.

This article originally appeared on Crestview News Bulletin: FINANCIAL FOCUS: Work to become a better investor