Andrew Harrer/Bloomberg/Getty Images Investment guru Bill Gross surprised Wall Street with his new job. Much of the news over the departure of Bill Gross from Pimco to Janus Capital Group serves only to distract investors from the intelligent and responsible management their portfolios. So I thought I'd give you a break from all the media hype and instead address some basics of bond investing. Many investors improperly view the purpose of fixed income in their portfolio. They are frustrated by today's low interest rates and seek higher yields. However, to generate those yields, they will have to consider extending the maturity date of their bonds or purchasing bonds with lower credit -- or both. These strategies come at a price. They increase risk. According to William Bernstein, the author of "The Intelligent Asset Allocator" and other excellent investing books, fixed income is "for emergency needs." Bonds should act as ballast to soften the volatility of your portfolio. Bernstein believes you should take no risk with the fixed-income portion of your portfolio. You should limit your purchases to Treasuries, certificates of deposit (FDIC-insured) and money market funds that invest primarily in Treasuries. You don't need Gross or any other fund manager to implement these purchases. If your fixed-income portfolio is $1 million or more, you might want to consider the benefits of a laddered bond portfolio. How to Increase Your Expected Returns There are a number of reasons why it makes more sense to take risks with stocks rather than bonds. In a taxable account, stocks are more tax efficient than bonds. There is also evidence indicating the risk adjusted returns of stocks are greater than bonds. Finally, managing the risk of lower-credit bonds can be very challenging. It is surprisingly easy to increase the expected return of your portfolio without taking additional risk in your fixed-income holdings. Simply increase your allocation to stocks. Of course, doing so will make your portfolio more volatile. Some important factors that play a meaningful role in determining the expected return of the stock portion of your portfolio are: Your exposure to small stocks. Your exposure to value stocks. Momentum. Profitability. A competent adviser should be able to structure the stock portion of your portfolio to seek the highest expected return for a given level of risk. Again, neither Gross nor any other bond fund manager is needed to do so. Avoid Actively Managed Bond Funds The financial media is in a dither over the effect that Gross' departure will have on Pimco, the investment giant he co-founded in 1971. There is speculation that billions of dollars of outflows will either follow him to Janus or move elsewhere. Here's what's missing from this debate. Why are you investing in any actively managed bond fund (where the bond manager attempts to beat a designated benchmark) in the first place? One study of 2,300 bond funds covering 1991 to 2008 found that investors in actively managed bond funds lost about 0.90 percent a year compared with lower-cost index bond funds. That's bad enough, but there is also the problem of prospectively identifying an outperforming bond fund manager. Gross is a prime example of this difficulty. He delivered many years of stellar performance at Pimco, consistently outperforming his benchmark. But if you relied on his past performance and invested last year, you would have been disappointed. Pimco's Total Return Fund (PTTRX) underperformed the Barclay's Aggregate Bond Index. The intense focus on Gross and whether he still has the magic mojo is fundamentally misplaced. You don't need him or any active bond manager to invest in a manner consistent with the evidence and sound data.
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