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By Christine Benz | 10-15-2010 02:30 PM

Ferri: How to Approach Bonds Today

Portfolio Solutions' Rick Ferri on bonds for tactical versus strategic portfolios, adding inflation protection to portfolios, why commodities don't work for long-term investors, and rebalancing strategies.

Christine Benz: I'm Christine Benz for Morningstar.com, here with the Bogleheads Reunion, and I'm here today with Rick Ferri.

Rick is the founder of Portfolio Solutions. He's a Forbes columnist, and he is also the author of several books, including the Power of Passive Investing, which is due out next month.

Rick, thanks so much for being here.

Rick Ferri: Thank you for having me.

Benz: So, we have a lot of ground to cover. You certainly write about a lot of different topics and manage investor money as well.

I'm going to start with what's going on in the fixed-income world right now. We have seen a huge stampede of assets going into bonds and bond funds over the past couple of years. Curious to get your take on investor expectations for fixed income, and how investors should be thinking about allocating their portfolios to fixed income right now?

Ferri: It's an interesting question. There has been a lot of corporations that have been issuing a lot of debt, and there's been, of course, our government, which has been issuing a lot of debt, and so there is a lot of supply out there, but this huge demand has been coming in to meet the supply, and the demand had been coming in because of, I think, a fear of a double-dip recession.

So that could be slowing down now as we see that the chances for a double-dip recession are really starting to subside as corporate earnings continue to come in and as the economic data continues to come out, which shows that the economy is actually recovering and doing fairly well.

So the bond market, as a tactical asset allocation play, may not be a good idea, but if you're a long-term buyer, and you have a set strategic allocation, and your equities go up because the stock market is going up, and you want to sell some and bring it down to your allocation and buy bonds, that's perfectly fine.

Benz: I also wanted to talk to you about inflation-protecting a fixed-income portfolio, and I know this is one question our users have wrestled with, how much of their bond portfolios belong in TIPS. What's your take on a question like that? And where should investors find guidance?

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