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Thursday, May 30, 2013 - 10:00

Protect Your Portfolio Against A Meltdown In Stocks With These 2 Bond Funds

Thursday, May 30, 2013 - 10:00am

I’ll never forget attending my first investing seminar with my uncle and grandfather back in the late 1970s. It was hosted by Charles Givens, who wrote the book "Wealth Without Risk."

I was about 15 at the time and had never seen a real Rolls-Royce, which Givens drove to the seminar, or an actual bona fide millionaire, so I was quite impressed and listened intently to what he had to say. Although Givens' business dealings were later proved not to have been completely legitimate, what he taught in his books and seminars are mostly solid, actionable ideas.

One of his favorite sayings at the seminar was "When rates are low, stocks will grow, and when rates are high, stocks will die." He went on to talk about stock and bond prices and how they move in cycles depending on interest rates and economic activity.

Remember, this was during the ultra-high-interest days of the '70s. Most of what Givens talked about was above my adolescent understanding, but I've always remembered what he said about that correlation.

So far in 2013, we've seen a soaring stock market and a seriously lackluster market in bonds. However, many investors believe the stock market's bullish run is nearly over, which may be building a bullish case for the bond market.

As investors take profits from the bullish stock market, stocks may decline. This would result in money shifting into the bond market, pushing it higher.

This scenario may or may not happen exactly as I've described, but allocating some of your portfolio to the bond market is always a wise decision. Right now, I like these two bond funds for diversification away from the overheated stock market.

PIMCO Emerging Local Bond Institutional (Nasdaq: PELBX)
This fund invests in local currency bonds rather than those denominated in U.S. dollars. The institutional shares presently yield 3.7%. With $15 billion in assets, it is the oldest and most established of the 16 bond funds in the sector.

PIMCO chief Bill Gross recently supported the local currency bond fund by saying the Mexican peso is a great currency due to Mexico’s low debt levels and interest rate stability. Technically, the price has dropped from over $11.20 to about $10.60, which is supported by the 200-day simple moving average.

Metropolitan West Unconstrained (Nasdaq: MWCRX)
This is the bond fund you want to own if you believe interest rates are about to increase. The fund sells Treasurys short, meaning it's poised to profit if Treasurys drop. Therefore, rising interest rates will be a big positive for this bond fund. However, should Treasury yields fall, this fund will lose money. The shares currently yield 3.6%.

Twenty percent of its assets are in non-government-backed mortgages and 10% is allocated to junk bonds and emerging markets, adding some risk to the mix. Technically, this bond fund has also pulled back, making it an attractive buy at these levels.

Risks to Consider: These suggestions are merely ideas on how to use bonds to diversify your investment portfolio. Although it appears that interest rates have nowhere to go but higher, it is not known when this will happen. In addition, many political and economic risks of emerging markets create headwinds for both funds.

Action to Take --> I like both these funds for a small allocation of an investment portfolio, especially for diversification away from a potentially overheated stock market. Remember to use stops properly.

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David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.