Tags: Pursche | Bonds | Obama | Stocks

Pursche: Buy Individual Bonds if Obama Wins but Avoid Stocks

Wednesday, 03 Oct 2012 02:04 PM

Investors should buy individual bonds if President Barack Obama is re-elected this November and avoid bond funds and stocks, dividend-paying equities especially, said Oliver Pursche, president of Gary Goldberg Financial Services and Forbes contributor.

An Obama victory would bring in legislation that would hike taxes on investment income, which would eat into dividends.

"Specifically, an Obama victory will stoke fear of higher taxes on dividends and ordinary income, and drive a rotation out of investment grade and high-yield corporate bonds and into municipal bonds. This is bad news for dividend champions such as McDonalds (MCD), Procter & Gamble (PG), 3M (MMM), Pfizer (PFE) and Exxon (XOM)," Pursche wrote in a Forbes column.

Editor's Note: Obama Donor Banned This Video But You Can Watch it Here

Furthermore, interest rates will rise eventually, which would cut into the value of bonds, but a bond fund takes away flexibility associated with buying and selling individual debt.

"First, should rates climb, bond values will fall, and therefore the risk of capital loss is palpable. I feel this risk is made worse when bonds are held in a mutual fund or ETF rather than individually," Pursche wrote.

"Specifically, because bond fund managers rotate in and out of bonds as rates climb, the risk of capital losses never, ever goes away."

By holding onto an individual bond instead of shuffling in an out via a fund, an investor may see the value of that asset go down as rates rise, but at the end of the day, the investor gets his or her money back at par upon maturity.

Furthermore, buying individual bonds allows the investor to pick maturities to coincide with life events.

"Funding tuition? Retirement? Home improvement? Buying individual bonds can keep you on track," Pursche wrote.

One noted investor has warned that bonds could suffer if the U.S. doesn't tackle its deficits.

Interest rates are very low today, but sooner or later, they will rise at a time when the economy is awash in liquidity due to Federal Reserve stimulus measures, a recipe for inflation that could especially sting a debt-laden economy.

"If we continue to close our eyes to existing 8 percent of GDP deficits, which when including Social Security, Medicaid and Medicare liabilities compose an average estimated 11 percent annual 'fiscal gap,' then we will begin to resemble Greece before the turn of the next decade," Bill Gross, founder of Pimco, the world's largest bond fund, wrote in an investment outlook.

"Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline. Bonds would be burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive within the 'Ring of Fire.'"

Editor's Note: Obama Donor Banned This Video But You Can Watch it Here

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