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Hold On to Your Principal With This Type of Bond

Wednesday, 7 Mar 2012 | 6:29 PM ET
Fast Money Portfolio
Fast Money Portfolio

Not guarding against inflation could mean a loss of principle — and one expert says low-duration bond funds are one way to avoid that.

“If you think about inflation, it’s quite insidious,” Philip Barach, president of Doubleline Capital, said Thursday.

Where to Park Cash When Rates Are Zero?
Investors seeking higher yields should consider low-duration bond funds with low interest rate risk, says Phil Barach, president of DoubleLine.

Barach said inflation has run at 2.4 percent over the past five years and was projected to remain in a similar range for the next five years, which could mean another loss of 10 to 12 percent going forward.

“In the past, most money funds paid you a return more or less equal to inflation, but that’s not the case today,” he said. “So investors need to take some sort of overt steps into a low-duration bond fund or something else in order to achieve a return at least equal to inflation.”

Barach said low-duration funds were those with maturity terms of 1 to 3 years.

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A diversified portfolio was the best approach, he said, and that could include a combination of investment-grade corporate bonds, U.S. dollar-denominated emerging markets and commercial backed-securities.

Important primarily from the preservation of principle, low-duration funds were just one portfolio component.

“I think people who are going into a low-duration fund are taking a baby step away from a money market fund,” he said.

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