Played smartly, a bond portfolio still has an important role to play for investors, says Marilyn Cohen, who explains her preferred strategy.
Let's talk about the bond market with Marilyn Cohen today. Hi Marilyn, and thanks for being here.
My pleasure, Nancy. Thank you.
So what's going on with the bond markets? I mean, interest rates are so terrible. Some places are even talking in Europe about negative interest rates on their bonds. Why would anybody buy a bond today?
Well, you know, I think you have to be very selective as far as what kind of bonds you buy. Certainly, buying a bond that's yielding less than ten basis points or less than two basis points is ludicrous. After tax, after inflation, after everything, you get nothing.
But why would anybody buy bonds or stay in bonds? It's because they are Steady Eddies of all of these markets. Everybody's trying to call the top in the bond market—all the bigwigs, Bill Gross, BlackRock, you name it—and the truth is, the only person that anybody should listen to is Ben Bernanke.
Why? Because if you've listened to him throughout the whole quantitative easing, since 2008, you've made money, and he isn't ready to throw in the towel.
When he throws in the towel, you'll see it very well telegraphed. It'll mean inflation hits 2.5% and/or unemployment goes to 6.5%. Other than that, all of the central banks have lowered interest rates, so I think that locking and loading in a fixed income stream makes sense.
The big money has been made—don't misunderstand me—in bond land. It sure has. But I think that people who live off of their income and can't afford to go through another 2008 or another tech wreck, they need a bond allocation.
And would you go just short-term?
I would do a combination. I would do some short-term individual bonds, short-term meaning some three, five, seven years. I'd maybe go out to eight years. So your average duration or sensitivity is about 3.25 to 3.5 years.
And I would probably then buy some bond funds, which I've never been a big advocate for, in areas that you can't do yourself, like the mortgage-backed securities area. One of the bond funds I like is DoubleLine Total Return (DBLTX).
I think that there is a way to kind of hedge yourself. But Nancy, it isn't over until it's over, and the fat lady has not sung even one tune yet.
Well, that's interesting. I don't know what's going to happen in the market. As you said, everybody's calling the top here, there, and everywhere, and I guess it doesn't really matter. Like you said, just listen to Bernanke and see which way he's projecting.
Exactly, because even when you watch CNBC and you see all of these regional presidents talk about, "Oh, we need to stop buying bonds, we need to do this and that," once they get behind those closed doors in their FOMC meetings, they're like little girls in the schoolyard; they just follow Chairman Bernanke and do whatever he wants.
Until that changes, I think that you stick with some portion, depending upon your risk level, in bonds and fixed-income type of securities. Because if interest rates go up, do you think you're going to be happy with your 4% yield on Verizon (VZ)? That isn't going to be enough.
That's right.
I just think there's only one person to listen to, and that's the Chairman.
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