Q: Do you feel investors should be concerned about a bond bear market?
Glassman: Yes, but not for the reasons you might think. A rising rate environment is not a bad thing. As long as it doesn't happen in an abrupt, uncontrolled manner, it's actually a good thing. Why? Because rising interest rates allow investors who need income to reinvest principal that comes due from their bonds at higher rates.
Personally, I think more is being made of the individual risks in a bond bear market.
What I am truly most concerned about is not rising rates, but about the potential behavior by bond investors. So much money has flowed into "bonds funds" that if/when this money tries to move out en masse, it could cause a disruption in the liquidity and pricing for bond funds of all types.
Q: What should investors do to prepare for this?
Glassman: The most conservative thing one can do is to shorten the maturities of the bond funds or individual bonds they own. This ensures that if/when rates rise, their bonds will not likely have lost much in price decline, and this capital can be reinvested periodically into a higher-rate environment.
We suggest maintaining a balanced portfolio of shorter-duration exposures [for immediate cash-flow needs] married to higher-yielding, higher-quality noninvestment-grade corporate bonds and loan funds.
(Read more: Don't bail on bonds)
Q: What impact does all of this have on stocks and bonds?
Glassman: In a rising rate environment, bonds with the lowest coupons and longest maturities will most certainly decline in value. However, if rates are rising for the right reasons—stronger economy, more jobs, greater demand for loans/credit—then high-yield bonds should hold up well, and floating-rate bonds [bank debt] should do well, too.
Again, if the economy is improving—and along with that improvement comes increased revenues and profits—then stocks don't necessarily have to decline as rates rise. In fact, there have been many periods during which stocks have increased when interest rates rose.