What should worry investors who have some of their money in bonds? Marilyn Cohen, founder of Envision Capital Management, says we live in "extraordinary times" and by that, she means there are plenty of risks. She notes that the Federal Reserve has been keeping rates low, but that eventually "they have to stop buying so many securities and eventually let the market be the market." She says the result for investors may be "painful" when rates do begin to rise and bonds decline in price.
In the interview, Cohen says she advises clients adopt a "bunker mentality" where they "sacrifice yield in the short haul for preservation of capital."
You'll also hear a report from Bankrate's Janna Herron. She has some advice on how to make sure you get all the credit card rewards you are owed.
Bonds 101: Do's and don'ts for fixed-income investors
Bond investors need to keep a "bunker mentality" while waiting for interest rates bound to rise.
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Mark Hamrick: From Bankrate.com, this is Your Money This Week. Here, we connect the dots between what's happening in the world and your wallet. I'm Mark Hamrick, reporting from Washington.
Hamrick: Federal Reserve has kept benchmark interest rates as low as they can go for years now. What does that mean for fixed-income investors? We chat with Marilyn Cohen, one of the nation's best known experts on bonds. Bankrate's Janna Herron checks in with some advice on how to ensure you what gets what's coming to you when it comes to credit card rewards. But first, our look at bonds.
Stocks seem to get all the attention when it comes to day-to-day chatter. But there's no doubt investors of all ages should look at bonds for a portion of their portfolio. We spoke with Marilyn Cohen, founder in chief of investment strategy of Envision Capital Management. I began by asking her whether there's anything in particular investors need to be looking at these days in the fixed-income world.
Marilyn Cohen: Well, Mark, I think these are extraordinary times. And they are extraordinarily different than in the past. And no matter how sophisticated an investor is, either individual or an institutional investor, we've seen some things happen that have never happened before. For instance, in the municipal bonds space, a major city like Detroit filing for bankruptcy, a major territory of the U.S. like Puerto Rico in such dire distress that most of us can't see a way out. So I think that people have to rejigger their mindset both for the short term and the long term, and try to navigate around most of these sinkholes that look pretty deep.
Hamrick: Now knowing that you're particularly an expert on fixed income, we have an interest rate environment these days where rates, generally speaking, are thought to be as low as they possibly can go, and we're talking, obviously, about the U.S. environment. What is the risk for investors right now as it relates to fixed income and bonds?
Cohen: Well, the risk for investors are multifold. No. 1, the risk is higher interest rates. And we saw in the May/June bond market swoon that the most sophisticated of interest rate investors pretty much freaked out. Rates went up, prices went down, and we had a blood bath, really, and not to be a drama queen, in the muni market in which we saw mutual fund sales out of munis just continue relentlessly week after week. So I think one of the bottom lines is that you do have to go with the flow. You try to fight the Fed or fight the flow, we will be in even more of a pickle.
So rates look like they continue to be limbo low based on the Fed, and we had a big head fake from the Fed saying that they weren't in fact going to taper in their September meeting. And eventually you know that they have to stop buying so many securities and eventually let the market be the market. So I think that that is what's ahead of us, and I think it's going to be painful.
Hamrick: So when you say painful, does that mean you think the rise in interest rates and obviously, the correlating decline in bond price could be more significant than what people are looking at?
Cohen: I think that the rise in bond yields will freak a lot of people out. The reason why I say that is because a lot of people left equities during the credit crisis and said, "Get me the heck out. I'm never going back into the stock market." And they stampeded into bonds and bond funds thinking, "Phew, I'm going to stay here. I'm safe. I'm secure." And they were for many years until the economy started getting better. Until the Fed started moaning and groaning that they had to taper. And I think that that is what really put a kind of a crimp in everybody's appetite for bonds. I know a lot of people hate bonds and bond funds. But I think that you can't invest like you did in the past post-credit crisis. You have to be more prudent and look for less risk and less yield to wait out whatever is going to happen ahead of us.
Hamrick: Do you sense that people are retaining some of that risk aversion, even to fixed income these days?
Cohen: Absolutely. Absolutely, yeah. You have seen a lot of money flow into these floating-rate municipal bond exchange-traded funds and closed-in funds out of long-term bond funds. You have an aversion now to long-term municipal bond funds. Particularly those that are laden with Puerto Rico debt because people are worried about Puerto Rico. So there's a lot of moving parts and unfortunately, none of them are good at the moment.
Hamrick: So when you're trying to coach people to make the best possible decisions, how do you answer those concerns?
Cohen: I answer by saying, "Let's do the following: Let's have a bunker mentality," meaning that we will sacrifice yield in the short hall for preservation of capital and be able to be opportunistic once either everything hits the fan or once when the Fed starts to realize that the U.S. economy can stand on its own, and then rates will either drift up or spike up. When we were at a 3 percent yield on the 10 year during the debacle in May and June, I thought to myself, "Let her begin." Are we going to 3 ¼ or 3 ½? It will eventually choke off the U.S. economic muddle and growth and will go into a recession. So, you know, there's a cyclicality to it. It's not a 20-year cycle that we're talking about. But I think you have to have cut or dry, meaning money that's loose, and reduce your long-term maturities to shorter-term maturities, so you can take advantage of what's going to be out there for us.
Hamrick: So the masters of the universe in recent times, as it relates to bond buying, of course have been central banks. And we know the big headline in Washington these days is that Ben Bernanke is stepping away, and that if the Senate gives its OK, Janet Yellen will be the new Fed chair. Does that change the way that you look at that kind of an equation, or is that really more about the coach rather than the ball being thrown downfield?
Cohen: I think Janet Yellen will be more of the same that we have seen with Ben Bernanke, but I think the pressure from the regional presidents will be significantly louder. If the Fed is really data dependent like it says it is, then lo and behold, we will see the Fed taper its bond purchases because the economy, particularly certain sectors like automobiles, are doing quite well, thank you, on their own. So I don't think that we're going to see another five years of this kind of quantitative easing, bond buying, etc. I think that this will be part of the history books. Not shortly but in the intermediate term.
Hamrick: Marilyn Cohen, it's always a pleasure to catch up with you, and thank you so much for your time.
Cohen: Thank you.
Hamrick: Marilyn Cohen, founder of Envision Capital Management. She spoke with us from Los Angeles.
Hamrick: Next up, Bankrate's Janna Herron, who's our consumer advocate involving credit cards. In particular, she's looking at credit card rewards.
Janna Herron: Here is a word of caution for all you savvy consumers with rewards credit cards: You might not be getting the rewards you're owed if your card doesn't categorize your purchases correctly. Let me explain: All the payment networks -- that's Visa, MasterCard, American Express and Discover -- assign retailers codes to distinguish, say, a department store from a grocery store. Credit card companies depend on these codes to dole out your rewards. For example, one rewards credit card may give you 3 percent back on every dollar you spend at a supermarket. But if you do your food shopping at Wal-Mart your card may not recognize those grocery purchases because Wal-Mart is coded as a superstore rather than a standalone supermarket. Same thing with Costco, which is coded as a warehouse club. This is important to consider when you're shopping around for a rewards credit card. Especially if you're looking at cards that give extra rewards for specific types of purchases.
Consumers with credit cards that feature quarterly bonus categories should also pay attention. For instance, you may get 5 percent back for online purchases made with your rewards card this quarter, but airline tickets or hotels paid for online could be excluded. Of course, the best way to know the exceptions is to read the fine print of your credit card rewards program. And to check regularly to make sure you're getting the rewards you earned. I'm Janna Herron for Your Money This Week.
Hamrick: Finally, our look at this week in history. We go back to Oct. 22, 1907. Did you know there was a severe economic downturn at the beginning of the previous century? It began with the panic of 1907. The stock market fell about 50 percent from its peak. A panic filtered throughout the country, with many banks going bankrupt. A financial earthquake began with a failed attempt to control the stock of United Copper Co., leading to the failure of Knickerbocker Trust Co., which was New York's third-largest trust.
Hamrick: You have been listening to Your Money This Week. Our thanks to this week's guest, Marilyn Cohen of Envision Capital Management. If you enjoyed our podcast, please check us out on iTunes, and rate and subscribe to the program. We're hoping that you can help us to get the word out. Also, check out our other podcast, Special Report, with breaking news and special features. For more on this and other personal finance issues, visit Bankrate.com, and you can follow us on Twitter @bankrate. Thanks to producer Lucas Wysocki for his work in the studio. I'm Mark Hamrick. From all of us here at Bankrate, here's hoping you have a great week.