Bill Gross – Seesaw Rider

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Bill Gross  INVESTMENT OUTLOOK

There’s 50 ways to leave your lover and maybe more than that to lose your money or “break the buck,” as some label it in the money markets. You can buy the Brooklyn Bridge, bet on the Cubs to win the World Series or have owned 30 year Treasury bonds in 2013, to name just a few. But bridges and baseball aside, what you’re probably interested in hearing from me is how to avoid breaking your investment buck in 2014.

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First of all, some disclosures: There are no guarantees, and staying above water in financial markets is not one of them. If you want a life preserver buy a Treasury bill, but then the 6 basis point yield may not excite you. Secondly, I’ve had lots of experience in breaking the buck so the advice may be somewhat tainted. Having started at PIMCO in 1971, there followed an intermittent stretch of nearly 10 years when yours truly was dog-paddling like crazy just to stay afloat. Still, PIMCO’s waterwings functioned better than most, so that when the time came for yields to drop and prices to go up in 1981, we were well positioned for a 30 year bull market.

Yet having experienced those formative years – with 2013 now being one of them in total return space – it’s helpful to remember some of the client and indeed personal frustrations that accompanied them. When your annual return shows a minus sign, clients wonder why they should pay you a fee to lose money. They have a point, although it may be somewhat shortsighted. A few also struggle to understand that bond prices go down when interest rates go up, and that with interest rates so low, the odds of up as opposed to down are slightly tilted. This principle I call the teeter totter or “seesaw.” I used to explain bonds to my mom every Thanksgiving or so, on a journey up to San Francisco. She wondered then why she was always 10 or 11% richer on her statement at year-end, remarking that these “yields” were pretty high. I reminded her that the 11% or so was a total return not a yield and that when interest rates went down, prices went up just like a “teeter totter.” That seemed to help her understand the “bond market” much like it would help some “mom and pop” investors understand it today, although bonds switched seats so to speak on the seesaw in 2013.

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