Back in the beginning of the summer we started getting worried about the ability of states and municipalities to continue paying interest and principal on their municipal bonds in this economic downturn.

Open up any business section of a newspaper and you'll read story after story about the fall in tax revenues on the state and local levels of just about every state.

That begged the question--if this recession lasts as long as we're afraid it might, how will all those municipalities' continue to pay bondholders?

Mention this to your broker and his or her response will be that your portfolio only contains highly rated bonds. You have nothing to worry about.

What the broker may not even be aware of is a startling fact that came out in a letter sent to the SEC by an employee of one of the big ratings firms. In the letter this employee admitted that once a bond is rated for its initial offering to the public, it is rarely if ever scrutinized and reviewed again!

So what came into a portfolio as an AAA rated bond might now be only an A or even worse.

When Ken and I trained to be stockbrokers we were taught that the bond rating firms constantly reviewed the bonds and would downgrade as necessary. That type of early warning system allowed us to comfortably sell muni bonds to clients and not worry.

Just when you think you know it all, a bombshell like this lands in your lap, destroys your comfort zone and changes the landscape around you.

We are not telling you to sell your municipal bonds. But we are suggesting that you have a little chat with your broker to see if he or she is even aware of this ratings disclosure and review your bond holdings together.

And make sure you understand the basics about investing in tax-free municipal bonds.

Read More In: Invest Wisely