If you win the lottery, municipal bonds would work

— -- Q: If I won $10 million in the lottery, wouldn't it be smartest to put all the money in municipal bonds?

A: Professional athletes are all too familiar with what happens when they squander a lead. A comfortable lead early in a football game, Olympic event or basketball game can often cause players to get overly aggressive, make mistakes and let that lead slip away.

The same can happen in investing. If you win $10 million and invest properly, you could have more than enough money to sustain yourself and your heirs for a long time. Would you invest that entire sum in risky and unproven stocks and potentially lose it all? Probably not.

And that is why, depending on your tax bracket, a case can be made for municipal bonds. Muni bonds are generally sold by local governments and government agencies to pay for projects for cities, states and counties. The biggest draw of muni bonds is that the interest they pay is exempt from federal income tax. If you're in a high tax bracket, that can be attractive.

And the returns of muni bonds have been respectable. Muni bonds, on average, have generated average annual returns of 4.1% since 1924, according to Global Financial Data. If you're in the 28% tax bracket, that's like getting 5.7% from a taxable bond. And that rate of return has exceeded the 5.3% average annual return from 10-year Treasuries during a comparable period, Global Financial Data says.

But, there's a caveat here. Muni bonds are about 14% riskier than 10-year Treasuries, so you're taking on considerable extra risk to get that extra bit of return.

And there's a bigger concern about loading up on muni bonds. First, a 5.7% taxable rate of return pales next to the average return of stocks. Studies have shown stocks return 10% a year or so over the long term. By only owning muni bond, you'll lag that by a wide margin. Second, muni bonds have bad years, too. Muni bonds lost 11.7% of their value, for instance, in 1994, says Global Financial Data. That's not a big loss, but it shows that muni bonds aren't totally safe, either.