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Beat the Bear With Bonds

03/20/2008 12:00 am EST


Neil George

Editor, Profitable Investing

Neil George, editor of Personal Finance, says investors can stay ahead of the bear market if they have the right bond funds in their portfolios.

It’s this simple: A bear market is when you’re losing money. And it’s a bear market right now for individual investors.

The usual suspects of the stock market may enjoy short-term bounces, but it’s hard to come up with scenarios whereby a subdued economy and a credit mess add up to a bull run for the Standard & Poor’s 500. [But] rather than whining about the markets’ woes, let’s find what will work in the months to come.

We’ve never been cheerleaders for the US stock market, because nobody makes any serious money from the S&P, even during the good times. We happily go off the beaten path to find stocks, bonds, and funds that most average investors (and their brokers) are often too lazy or too incompetent to find until well after they’ve become screaming successes.

To make your portfolio work through good, bad, and indifferent times, you must find solid, expanding businesses that are focused on shareholders.

During the last six months, stocks have been on a slip and slide, falling nearly 8%. Bonds, which have always formed the base of the Personal Financeportfolios, have risen more than 8%.

This doesn’t mean you should dump every stock and go with bonds. It does mean that you need to be on the lookout for alternatives to the general stock market.

Your first move is to buy some bonds, but not just any bonds. The general bond market is just like the general stock market. You can do a whole lot better. First, don’t buy an index mutual fund or exchange traded fund. Instead, buy solid government and corporate bonds, both domestic and foreign, to make real money.

One of five core closed-end bond funds in [our] Cash Cows, PIMCO Strategic Global Government (NYSE: RCS) has proven its worth year after year by paying solid dividends. It’s currently yielding more than 7%. And come inflation, credit fiascos, and all other drama, it keeps plodding along with a positive return of more than 5% on an average annual basis—sometimes more, sometimes less, but it’s worked and will continue to do so.

It works even better when we add in the other core Cash Cow bond funds, [like] AllianceBernstein Global High Yield (NYSE: AWF) and BlackRock Income Opportunity (NYSE: BNA) at current market prices. (The Pimco fund closed above $10.50 Wednesday, AWF closed below $13, and BlackRock Income closed below $10—Editor.)

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