A lack of direction in both policy and politics will create a highly volatile investing environment for an extended period, Pimco's Mohamed El-Erian told CNBC.
Citing the difficulties in Washington in getting a debt ceiling deal done, the uncertainties expressed at the Federal Reserve over the economy's direction, and the European debt crisis, the co-CEO of the world's largest bond manager said investors should be prepared for a rocky road.
"Investors have to understand that there are some major multi-year themes playing out and they have to recognize that it's going to cause tremendous volatility," El-Erian said. "They have to reflect it in their portfolios that different countries act differently. Different companies are going to act differently."
President Obama and Republican congressional leaders remain at an impasse over what conditions will be attached to the extension of the nation's $14.3 trillion debt limit.
At the same time, Federal Reserve Chairman Ben Bernanke, echoing comments made in recent Fed meeting minutes, told Congress that the central bank is unsure of whether the economy will grow and necessitate Fed tightening or if it will contract and require more accommodative monetary policy.
In such a world—part of what Pimco has branded the "new normal"—investors need to choose carefully, El-Erian said.
"We've gone from this notion (in the debt ceiling talks) of a grand bargain to a notion of a mini-deal. Now we're heading toward just a stop-gap. Stop-gap is the worst possible thing for both parties," he said. "It means every three to six months we're going to have issues again. The market's going to have to price in an uncertainty premium, and that's not good with any asset."
Pimco has found itself under a microscope lately as the firm, which mangers the massive Total Return fund, backed out of its position in Treasurys, only to add some short-duration notes recently.
Both El-Erian and his colleague, Bill Gross, have emphasized that while the firm missed gains in Treasurys it has been doing well in investments with German and Canadian debt as well as positions in other countries with stronger balance sheets than the US.
"Don't look at just one holding," El-Erian said. "Look at one holding within the context of a portfolio construction."