This year's market gains will need more than an improving economic picture and investor willingness to shrug off the European debt crisis, Pimco's Mohamed El-Erian said.
"It's too early to declare victory," the co-CEO for the world's largest bond fund told CNBC in an interview Tuesday.
He outlined three issues that must be addressed if the 2012 rally is to continue:
1) Geopolitical riskthat remains both in Europe and the Middle East.
2) A "handoff to more sustainable policies" beyond the monetary easing from the world's central banks.
3) Getting "long-term investors" off the sidelines and putting their money to work in riskier assets than bonds.
As those headwinds remain, El-Erian advises investors to dedicate a smaller portion of their portfolios to stocks and a larger allocation toward precious metals. On bonds, he advocates shorter duration, with a target of seven years or less, which is where the Federal Reserve has focused its debt-buying efforts.
"They're both willing and able," El-Erian said of the Fed and other central banks and aggressive monetary policies. "The issue is the effectiveness. Even the central bankers are beginning to announce that it is not just about the benefits, it's also about the costs and risks."
"The central banks are absolutely committed, but we must not extrapolate that they will remain highly effective," he continued. "They need help. They are a bridge and they have to be a bridge to somewhere. So far the other government agencies are on the sidelines."
An unexpected surge in job creation for the US will help investors sentiment, he said.
The government announced Friday that the unemployment ratehad dropped to 8.3 percent and the economy created a net 243,000 new jobs in January. Those numbers overshadowed a steep decrease in the size of the workforce as well as continued structural problems in the employment picture.
In the meantime, markets have continued their sharp upward trajectory as the Standard & Poor's 500 has rallied 7 percent year to date.
The gains have come despite persistent worries that Greece and other European nations could default on sovereign debt payments they must make in the coming months.
"There's more to do," El-Erian said. "It's critical that nothing be done to interrupt this wonderful cyclical bounce. We want the cyclical bounce to translate into a secular bounce, because that's what the markets need to sustain the wonderful returns so far this year."