Brokerage Recommendations for Individual Municipal Bonds

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tixoboy
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Brokerage Recommendations for Individual Municipal Bonds

Post by tixoboy »

Long-time lurker, first time caller!

I'm curious if anyone here has specific brokerage recommendations for buying individual municipal bonds (both taxable and tax-free) on the secondary market or the new issue market. I've tried Merrill Edge, Schwab, E*trade, and Fidelity. So far, I've found that Fidelity offers the best experience - a robust searching capability, after-hours inventory snapshot for planning purposes, and new issue email notifications. But, I wonder if there's something better out there which is even better that supports the following:

(1) Access to a wider new issue market - Fidelity, like many brokerages I gather, have access to a specific set of new issues (I assume there's some partnership with issuing institutions). Many of the new bond issues registered with EMMA seem to go to specific banks which are not accessible to retail Fidelity investors.

(2) Even finer-grained searching capability / bid possibilities - I'm interested in a very specific set of municipal bonds that match very few CUSIP (long-term, non-callable / make-whole-call municipal bonds). I'm not able to do a search through the whole bond market on every issue that ever fit this set of criteria, but I would want to. In addition, I'd likely want to bid on individual CUSIPs after identifying them, and Fidelity generally doesn't allow this unless one places an order through the trading desk for a high quantity of bonds (50-200+ per my last conversation with them).
000
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by 000 »

I don't have an answer for you, but I wonder if Interactive Brokers has any of the features you want.
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typical.investor
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by typical.investor »

000 wrote: Fri Jun 09, 2023 2:38 am I don't have an answer for you, but I wonder if Interactive Brokers has any of the features you want.
You'd need to use Trader Workstation. And you need to subscribe to CUSIP services which is like $1/month for their free tier or $2 for pro. It also asks for a subscription to filter by ratings.

I don't subscribe to anything (as I don't trade munis), but it seems like you can buy directly from the CUSIP if you do. I can't seem to find the ratings in Trader Workstation but you can see them in the bond info on the web. You can't buy from the web page though. There are links via the CUSIP in trader workstation so maybe you can see if you subscribe.

Searching my maturity and non-callable is possible but I see nothing on make-whole-call.

You could try their demo account. It has a lot of functionality but I am sure if it has data packages (like CUSIP).
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tixoboy
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by tixoboy »

I don't have an answer for you, but I wonder if Interactive Brokers has any of the features you want.
You'd need to use Trader Workstation. And you need to subscribe to CUSIP services which is like $1/month for their free tier or $2 for pro. It also asks for a subscription to filter by ratings.
Thank you both for the recommendations! I'll give IB w/ Trader Workstation a shot, and then report back on my experience here.
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typical.investor
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by typical.investor »

tixoboy wrote: Fri Jun 09, 2023 5:02 pm
I don't have an answer for you, but I wonder if Interactive Brokers has any of the features you want.
You'd need to use Trader Workstation. And you need to subscribe to CUSIP services which is like $1/month for their free tier or $2 for pro. It also asks for a subscription to filter by ratings.
Thank you both for the recommendations! I'll give IB w/ Trader Workstation a shot, and then report back on my experience here.
The search page is a little quirky. Make sure you check the option to see bonds with no bid/spread if you search outside of market hours or you will get no returns.

On my system, MACOS, it's java and I can't copy the CUSIPs to look up elsewhere. I ready IBKR has a new trading tool in the works that is still be tested and rolled our for incremental review.
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by beyou »

I wonder why do you want to purchase individual muni bonds vs a good muni bond fund ?

I worked in the fund management industry, with most of my experience in bonds and lots of that at top rated muni managers. The access to new issues and finding secondary market issues of interest did require a fair amount of work for for full time traders. They used MANY brokers since munis are thinly traded, there are millions of bonds outstanding. No matter what broker you use, your selection would be a tiny fraction of the muni universe. And the terms and conditions of bonds can be less standardized than you think.

People often discuss that they prefer individual bonds because they think you can’t lose $, but that is just believing what you want to believe. If rates skyrocket as they have, getting back par 20 years from now is less than what you could earn in total if you bought a new bond at higher rates. If you end up with less, how is that not losing $ on a relative basis. Funds and individual bond portfolios will perform the same way if they hold the same bonds, PERIOD. It is just the accounting/timing for cash flows that varies in the end.

The reasons to buy a fund are partly due to your question. A professional money manager specializing in munis, will have many many brokerages they deal with, and multiple online marketplaces to find you the best deals out there. They will monitor things like credit of issuers, calls, and when a better option arises, can swap to a new bond. Yes this could cause a “loss” but you may more than gain same amount going forward, if you use a top rated muni fund.

From what I saw working in the industry, you can never match the capabilities of a professional muni bond fund manager as a retail investor.
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by BigJohn »

I didn’t work in the industry but agree with beyou based on personal experience. The risk diversity of a fund combined with the costs hidden in the price paid by individuals vs institutions for individual bonds are big drivers of my opinion.

Lots of prior forum discussions on this topic to get more details, just search using terms like muni, individual, fund, ladder, etc.
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
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tixoboy
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by tixoboy »

beyou wrote: Sat Jun 10, 2023 8:00 am I wonder why do you want to purchase individual muni bonds vs a good muni bond fund ?

I worked in the fund management industry, with most of my experience in bonds and lots of that at top rated muni managers. The access to new issues and finding secondary market issues of interest did require a fair amount of work for for full time traders. They used MANY brokers since munis are thinly traded, there are millions of bonds outstanding. No matter what broker you use, your selection would be a tiny fraction of the muni universe. And the terms and conditions of bonds can be less standardized than you think.

People often discuss that they prefer individual bonds because they think you can’t lose $, but that is just believing what you want to believe. If rates skyrocket as they have, getting back par 20 years from now is less than what you could earn in total if you bought a new bond at higher rates. If you end up with less, how is that not losing $ on a relative basis. Funds and individual bond portfolios will perform the same way if they hold the same bonds, PERIOD. It is just the accounting/timing for cash flows that varies in the end.

The reasons to buy a fund are partly due to your question. A professional money manager specializing in munis, will have many many brokerages they deal with, and multiple online marketplaces to find you the best deals out there. They will monitor things like credit of issuers, calls, and when a better option arises, can swap to a new bond. Yes this could cause a “loss” but you may more than gain same amount going forward, if you use a top rated muni fund.

From what I saw working in the industry, you can never match the capabilities of a professional muni bond fund manager as a retail investor.
That's a significant question and possible I'm not making the best choice here.

My intended use case for these bonds is to generate after-tax income to start liability matching three expenses: (1) life insurance premiums for myself (2) property tax on two CA houses between myself and my spouse (3) depending on bond specifics, a way to start paying off one of our houses early to reduce cash flow needs. Since CA property tax is capped under prop 13, these 3 expenses are more-or-less nominally-denominated. I also expect these expenses to be fixed over a long duration (25-35 years), so I'd be interested in acquiring similarly long-duration bonds. I don't think I'd be concerned w/ NAV fluctuations given my intended use case.

I would love to acquire a good municipal bond fund, but I haven't found any that are top-rated, sufficiently long in duration, and also low on fees. I recognize that I'm delving into a world that is almost certainly better handled by professionals given the advanced access and training, but I just haven't found anything comparable that matches what I think I need.

Are there good muni bond funds that I'm overlooking?
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by 123 »

tixoboy wrote: Sat Jun 10, 2023 5:33 pm ...My intended use case for these bonds is to generate after-tax income to start liability matching three expenses: (1) life insurance premiums for myself (2) property tax on two CA houses between myself and my spouse (3) depending on bond specifics, a way to start paying off one of our houses early to reduce cash flow needs. Since CA property tax is capped under prop 13, these 3 expenses are more-or-less nominally-denominated. I also expect these expenses to be fixed over a long duration (25-35 years), so I'd be interested in acquiring similarly long-duration bonds. I don't think I'd be concerned w/ NAV fluctuations given my intended use case.

I would love to acquire a good municipal bond fund, but I haven't found any that are top-rated, sufficiently long in duration, and also low on fees. I recognize that I'm delving into a world that is almost certainly better handled by professionals given the advanced access and training, but I just haven't found anything comparable that matches what I think I need.

Are there good muni bond funds that I'm overlooking?
What state do you pay taxes to?
Are you looking for both state and federal qualified muni fund or federal muni only (not state specific)?
What are your tax brackets (federal/state)?
What is the expected amount of total muni bond purchase (within next 12 months)?

Based on my limited work involvement with a muni bond desk I was under the impression that they they normally increased the bond price 1% - 3% when dealing with retail investors because of the comparative small purchases and extra headaches involved with settlements.
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tixoboy
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by tixoboy »

What state do you pay taxes to?
California
Are you looking for both state and federal qualified muni fund or federal muni only (not state specific)?
Any of the above combinations could work. In my naive mind, something like 75% municipals across USA and 25% CA-only probably strikes a good balance between diversification and tax benefits.
What are your tax brackets (federal/state)?
Depending on how I do in the exact year, my range is:
State: 9.3-10.3%
Federal: 32%-37%

(+ net investment income tax of 3.8%)

So total:
45.1%-51.1%
What is the expected amount of total muni bond purchase (within next 12 months)?
100k-400k - this depends in part on incoming cash flow within the next 12 months
Based on my limited work involvement with a muni bond desk I was under the impression that they they normally increased the bond price 1% - 3% when dealing with retail investors because of the comparative small purchases and extra headaches involved with settlements.
Interesting. 1-3% doesn't seem too egregious - Fidelity itself charges 1% of face value on municipal bonds on the secondary market. I'd certainly pay 3% if that meant someone could actually find me a AAA-rated non-callable long-duration municipal bond maturing in 2053.
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by beyou »

tixoboy wrote: Sat Jun 10, 2023 5:33 pm
beyou wrote: Sat Jun 10, 2023 8:00 am I wonder why do you want to purchase individual muni bonds vs a good muni bond fund ?

I worked in the fund management industry, with most of my experience in bonds and lots of that at top rated muni managers. The access to new issues and finding secondary market issues of interest did require a fair amount of work for for full time traders. They used MANY brokers since munis are thinly traded, there are millions of bonds outstanding. No matter what broker you use, your selection would be a tiny fraction of the muni universe. And the terms and conditions of bonds can be less standardized than you think.

People often discuss that they prefer individual bonds because they think you can’t lose $, but that is just believing what you want to believe. If rates skyrocket as they have, getting back par 20 years from now is less than what you could earn in total if you bought a new bond at higher rates. If you end up with less, how is that not losing $ on a relative basis. Funds and individual bond portfolios will perform the same way if they hold the same bonds, PERIOD. It is just the accounting/timing for cash flows that varies in the end.

The reasons to buy a fund are partly due to your question. A professional money manager specializing in munis, will have many many brokerages they deal with, and multiple online marketplaces to find you the best deals out there. They will monitor things like credit of issuers, calls, and when a better option arises, can swap to a new bond. Yes this could cause a “loss” but you may more than gain same amount going forward, if you use a top rated muni fund.

From what I saw working in the industry, you can never match the capabilities of a professional muni bond fund manager as a retail investor.
That's a significant question and possible I'm not making the best choice here.

My intended use case for these bonds is to generate after-tax income to start liability matching three expenses: (1) life insurance premiums for myself (2) property tax on two CA houses between myself and my spouse (3) depending on bond specifics, a way to start paying off one of our houses early to reduce cash flow needs. Since CA property tax is capped under prop 13, these 3 expenses are more-or-less nominally-denominated. I also expect these expenses to be fixed over a long duration (25-35 years), so I'd be interested in acquiring similarly long-duration bonds. I don't think I'd be concerned w/ NAV fluctuations given my intended use case.

I would love to acquire a good municipal bond fund, but I haven't found any that are top-rated, sufficiently long in duration, and also low on fees. I recognize that I'm delving into a world that is almost certainly better handled by professionals given the advanced access and training, but I just haven't found anything comparable that matches what I think I need.

Are there good muni bond funds that I'm overlooking?
What is wrong with VCLAX and VCADX ?
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by Eric »

As an alternative to individual bonds, would a target-maturity muni-bond ETF help with your objectives? See, e.g., this one from iShares:

https://www.ishares.com/us/products/331 ... m-muni-etf

I've never invested in this type of ETF myself, but it seems designed to facilitate liability-matching, with potentially greater diversification and lower trading costs than individual muni bonds. At least, that's the concept; I defer to others who may be more familiar with how these products work in practice.
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tixoboy
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by tixoboy »

What is wrong with VCLAX and VCADX ?
VCLAX has an average stated maturity of 16.0 years and duration of 7.1 years.
VCADX has an average stated maturity of 8.9 years and duration of 4.6 years.

Since both of these are shorter than my 25-35 years in which I'd need this income, I'd have to take on reinvestment risk since future interest rates in 16.0 years could be above/below the current rate environment.
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tixoboy
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by tixoboy »

Eric wrote: Sat Jun 10, 2023 10:46 pm As an alternative to individual bonds, would a target-maturity muni-bond ETF help with your objectives? See, e.g., this one from iShares:

https://www.ishares.com/us/products/331 ... m-muni-etf

I've never invested in this type of ETF myself, but it seems designed to facilitate liability-matching, with potentially greater diversification and lower trading costs than individual muni bonds. At least, that's the concept; I defer to others who may be more familiar with how these products work in practice.
It would - these are close to perfect, but, the target-maturity date is too early - I'd be looking for one that matures in ~2058.
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by 000 »

How diversified is the market of Munis 25+ years out? Is the idiosyncratic issuer risk worth removing the rate reinvestment risk?
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by 8000m »

tixoboy wrote: Sun Jun 11, 2023 1:59 am
It would - these are close to perfect, but, the target-maturity date is too early - I'd be looking for one that matures in ~2058.
Congratulations, it appears that you & your family are in a great spot given your primary liabilities are somewhat nominally controlled. As to your long duration desires, hunting for munis (be it fund or individual issues) carrying 35 yr maturities (2058=/-) is going to be a lonely expedition. Hope I'm incorrect, but I'd be surprised to learn that there is a robust market for individual issues of that ilk.
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by beyou »

000 wrote: Sun Jun 11, 2023 2:01 am How diversified is the market of Munis 25+ years out? Is the idiosyncratic issuer risk worth removing the rate reinvestment risk?
Bingo.

OP is focusing on one risk to the exclusion of others.
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by beyou »

tixoboy wrote: Sun Jun 11, 2023 1:58 am
What is wrong with VCLAX and VCADX ?
VCLAX has an average stated maturity of 16.0 years and duration of 7.1 years.
VCADX has an average stated maturity of 8.9 years and duration of 4.6 years.

Since both of these are shorter than my 25-35 years in which I'd need this income, I'd have to take on reinvestment risk since future interest rates in 16.0 years could be above/below the current rate environment.
What is the total portfolio size ?

If large enough, one can open a separate account at one of the top muni bond managers who have all the tools and access to many brokers in tandem. They will gladly build and maintain a custom portfolio tailored to your needs (liability matches). But the cost will be high.

Alternatively use long US Treasuries if you want a safe unmanaged long term portfolio. Broadening beyond munis gives you more variety of long dated instruments. Do you really want to actively monitor for 30+ years ? Will your selections today be wise 10 or 20 years from now ?
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by BigJohn »

tixoboy wrote: Sun Jun 11, 2023 1:58 am
What is wrong with VCLAX and VCADX ?
VCLAX has an average stated maturity of 16.0 years and duration of 7.1 years.
VCADX has an average stated maturity of 8.9 years and duration of 4.6 years.

Since both of these are shorter than my 25-35 years in which I'd need this income, I'd have to take on reinvestment risk since future interest rates in 16.0 years could be above/below the current rate environment.
Maybe you're trying to overfit the solution? To get exactly what you want you'll have to find high quality muni bonds with the right maturity and they all have to be non-callable or you still have some reinvestment risk. Things may have changed but back when I thought individual munis were a good idea, almost all were callable. On top of that you have the higher fees.

Sometimes the right answer is to find what's "good enough" (note my signature :beer )
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by retiredjg »

tixoboy wrote: Sat Jun 10, 2023 5:33 pm Are there good muni bond funds that I'm overlooking?
Consider grabiner's frequently suggested mix of Vanguard's long term CA tax exempt and a short term national tax exempt fund. This will "average" to an intermediate term bond fund but more than half of the income would be exempt from your high CA state taxes.

I know this is not what you think you want or need, but it is an easy and reasonable and low cost suggestion that is more than "good enough".
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tixoboy
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by tixoboy »

8000m wrote: Sun Jun 11, 2023 6:11 am
tixoboy wrote: Sun Jun 11, 2023 1:59 am
It would - these are close to perfect, but, the target-maturity date is too early - I'd be looking for one that matures in ~2058.
Congratulations, it appears that you & your family are in a great spot given your primary liabilities are somewhat nominally controlled. As to your long duration desires, hunting for munis (be it fund or individual issues) carrying 35 yr maturities (2058=/-) is going to be a lonely expedition. Hope I'm incorrect, but I'd be surprised to learn that there is a robust market for individual issues of that ilk.
Thank you! Yes, I am very fortunate and grateful that these liabilities can be so nominally controlled.
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by tixoboy »

beyou wrote: Sun Jun 11, 2023 7:53 am
tixoboy wrote: Sun Jun 11, 2023 1:58 am
What is wrong with VCLAX and VCADX ?
VCLAX has an average stated maturity of 16.0 years and duration of 7.1 years.
VCADX has an average stated maturity of 8.9 years and duration of 4.6 years.

Since both of these are shorter than my 25-35 years in which I'd need this income, I'd have to take on reinvestment risk since future interest rates in 16.0 years could be above/below the current rate environment.
What is the total portfolio size ?

If large enough, one can open a separate account at one of the top muni bond managers who have all the tools and access to many brokers in tandem. They will gladly build and maintain a custom portfolio tailored to your needs (liability matches). But the cost will be high.

Alternatively use long US Treasuries if you want a safe unmanaged long term portfolio. Broadening beyond munis gives you more variety of long dated instruments. Do you really want to actively monitor for 30+ years ? Will your selections today be wise 10 or 20 years from now?
Total portfolio size is ~2.5-3M, so I would guess probably not big enough for customization at muni bond managers.



Thank you for the feedback, everyone! My IKBR account hasn't been setup yet where I have access to the tools, but it seems like what I would ideally want to do anyways is exceedingly hard for a retail investor and/or wouldn't be a good idea due to the small # of issuers and/or effort involved.

I could probably do something like combine VCLAX with long-duration, individually issued US treasuries to extend the total duration of bonds - that'd be closer and not too much effort.
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Re: Brokerage Recommendations for Individual Municipal Bonds

Post by beyou »

tixoboy wrote: Sun Jun 11, 2023 1:11 pm
beyou wrote: Sun Jun 11, 2023 7:53 am
tixoboy wrote: Sun Jun 11, 2023 1:58 am
What is wrong with VCLAX and VCADX ?
VCLAX has an average stated maturity of 16.0 years and duration of 7.1 years.
VCADX has an average stated maturity of 8.9 years and duration of 4.6 years.

Since both of these are shorter than my 25-35 years in which I'd need this income, I'd have to take on reinvestment risk since future interest rates in 16.0 years could be above/below the current rate environment.
What is the total portfolio size ?

If large enough, one can open a separate account at one of the top muni bond managers who have all the tools and access to many brokers in tandem. They will gladly build and maintain a custom portfolio tailored to your needs (liability matches). But the cost will be high.

Alternatively use long US Treasuries if you want a safe unmanaged long term portfolio. Broadening beyond munis gives you more variety of long dated instruments. Do you really want to actively monitor for 30+ years ? Will your selections today be wise 10 or 20 years from now?
Total portfolio size is ~2.5-3M, so I would guess probably not big enough for customization at muni bond managers.



Thank you for the feedback, everyone! My IKBR account hasn't been setup yet where I have access to the tools, but it seems like what I would ideally want to do anyways is exceedingly hard for a retail investor and/or wouldn't be a good idea due to the small # of issuers and/or effort involved.

I could probably do something like combine VCLAX with long-duration, individually issued US treasuries to extend the total duration of bonds - that'd be closer and not too much effort.
And as the years go by, if still in CA, can swap to VCADX as you get nearer to your liabilities, simplifying your portfolio further.

Note there are excellent muni money managers that would probably take a 2-3M portfolio but you would not like the fees. I would stick to this plan.
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