Building an effective portfolio comes down to a single goal: finding the balance between risk and potential rewards to generate maximum returns. Investors employ dozens of strategies to minimize risk and optimize portfolio growth. Many are quite complicated, but complexity doesn’t guarantee success.
In fact, the most effective investment strategy is deceptively simple – collect a diverse mix of assets that complement each other so that unexpected downturns in a company, industry, or the market as a whole don’t completely decimate the portfolio.
The first step in creating a diverse portfolio is finding the right asset class mix. The most common options include stocks, bonds, and cash or cash equivalents. Those who wish to explore additional asset classes may choose to invest in alternatives like real estate, futures, commodities, cryptocurrencies, etc.
Stocks and other less-common asset classes offer growth opportunities, while bonds and cash are used as a safety net. They carry very little risk, which ensures a certain level of stability. The trouble with cash is that returns are negligible; historically, bonds don’t deliver the type of growth available through securities.
What if it was possible to enjoy the safety of bonds without sacrificing returns? Bond King Jeffrey Gundlach, founder and CEO of the investment firm DoubleLine Capital LP, says it is possible. He believes that with his strategy, investors can achieve nine percent returns with minimal risk.
Who Is Jeff Gundlach?
Jeff Gundlach, net worth $2.2 billion, didn’t start off rich. His middle-class family couldn’t afford most luxuries and often had to get creative with their budget to make ends meet.
Gundlach loved to watch Lifestyles of the Rich and Famous, and he vowed to build a fortune of his own.
With that goal in mind, he earned a degree from the prestigious Dartmouth College, then moved on to a Ph.D. program at Yale University.
How Did Jeffrey Gundlach Make His Money?
When Gundlach left the Ivy League, he knew he wanted to work in the world of investing. His rare genius for mathematics allowed him to identify opportunities that most of his peers missed.
Unlike most money managers and financial advisors, Gundlach was convinced that the real key to building wealth was in the bond market – not securities.
Gundlach was hired as the manager of TCW’s $9.3 billion Total Return Bond Fund. His success at growing the portfolio reinforced his conviction that bonds were the best opportunity to maximize returns. He left TCW in 2009 to start his own firm, DoubleLine Capital LP.
In 2011, Barron’s Magazine put Gundlach on the cover, christening him “The New Bond King.” The label stuck, and today, no one doubts Jeff Gundlach’s predictions when it comes to the bond market.
In the midst of the current economic turmoil, investors tuned into Gundlach’s latest forecast for guidance – and he says now is the time to focus on bonds.
Jeffrey Gundlach: Bonds Are “Wickedly Cheap”
Since the start of 2022, Jeff Gundlach has been concerned with an impending recession, and economic developments over the past nine months haven’t changed his mind. He is alarmed by the sharp spike in interest rates, and in a recent Twitter Spaces conversation, he said the Federal Reserve should slow down.
Gundlach and many other economic experts believe that the Fed let the economy grow unchecked for too long, resulting in high inflation. Now he says that the central bank is going too far in the other direction, and he thinks there is a 75 percent chance that the United States economy will be in recession next year.
Gundlach believes deflation is a real risk, given the Fed’s over-tightening of its balance sheet and rapid interest rate increases. He predicts that the Consumer Price Index (CPI) could get as low as negative four percent. If so, there will be significant downward pressure on the stock market.
Gundlach believes that current conditions in the bond market prove his theory that a recession and deflation are imminent threats. Otherwise, he pointed out that with the current high rate of inflation, “Why is anyone buying a 3.50 percent-ish 30-year Treasury? The only logic that squares the circle is that inflation will overshoot to the downside.”
At this point, according to Gundlach, “Bonds are wickedly cheap to stocks,” so there is lots of opportunity for those who invest in bonds.
He said that investors who prefer to keep risk as low as possible should consider a bank loan fund, which has a short-term interest rate spread of approximately 300 basis points. These bonds have a default rate below one percent, which makes them safer than nearly any alternative.
This method of investing won’t deliver expected returns if interest rates drop again – especially if they return to practically zero, as they did during the height of the pandemic. Such a scenario seems quite unlikely, particularly over the next 12 months. That means investors who buy the bonds will have a reliable source of income for the next year with minimal risk.
Best Bank Loan Funds For Bond Investors
There are dozens of bank loan funds to choose from. These are some of the most highly rated:
Catalyst/CIFC Floating Rate Income Fund (CFRAX)
Eaton Vance Floating-Rate Advantage Fund Class A (EAFAX)
Fidelity Series Floating Rate High Income Fund (FFHCX)
Payden Floating Rate Fund (PYFIX)
T. Rowe Price Institutional Floating Rate Fund (RPIFX)
As with any mutual fund investment, be sure to compare expenses as excessive fees can reduce your returns significantly.
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