Investment advice: What to buy — and not buy — now | Economy | NewJerseyNewsroom.com -- Your State. Your News.

BY WARREN BOROSON

NEWJERSEYNEWSROOM.COM

BOROSON ON MONEY

Avoid long-term bonds. And bonds from European countries. Consider bonds from emerging market countries.

As for stocks, large-caps are looking better than small-caps. And, as with bonds, emerging-market stocks seem a better bet than European stocks.

That was advice given by Christopher Cordaro, CFA, CFP, chief investment officer for RegentAtlantic in Morristown, in a recent talk in Ridgewood.

Long-term bonds will get hurt if interest rates rise — and considering how low rates are now, it's a cinch they'll rise. "Interest rates are at an all-time low," he said, "and they have nowhere to go but up." Maybe in a year or two.

From 1981 to now, he noted, bonds enjoyed their greatest bull market ever, returning an inflation-adjusted 6.6 percent a year — thanks to declining interest rates. But from 1961 to 1981, during a period of rising interest rates, their real rate of return was minus 1.2 percent a year.

"I'm paid to lose sleep," said Cordaro, "and usually I lose sleep over stocks. Now I'm losing sleep over bonds."

As for the bonds of countries like Great Britain and Japan, their economies are just as hard-pressed as ours is, Cordaro went on. The bonds issued by emerging markets, with all their young workers, look far more attractive. India, Russia, and Brazil, he predicted, will grow far faster than countries in the developed world. And they have less currency risk vis-à-vis U.S. currency.

Cordaro suggested that investors stick with short- and intermediate-term bonds — of high quality.

As for high-yield bonds, which have enjoyed a terrific recent run-up, "It's probably time to leave the party — before the cops come."

He wasn't optimistic about Treasury Inflation Protected Securities (TIPs). They are yielding very little now — "And rising inflation is still a couple of years off."

Turning to stocks, Cordaro said that large caps are better values than small caps - even though they are "fairly valued," judging by their price-earnings ratios. He suggested going for higher quality. Small-cap stocks are not only pricey, he warned, but banks are charging more for lending money.

Emerging markets stocks had an unbelievably low p-e ratio of 4 last year. Now that the stocks have rallied nicely, "We have a neutral weighting."

As for real estate investment trusts, he said they were "confounding." Commercial REITs haven't seen the bottom yet, but lenders have postponed foreclosing.

Turning to dividend-paying stocks, Cordaro said it's possible that dividends will start being taxed again as ordinary income — making dividend-paying stocks less attractive. And corporations may decide to use their money to repurchase shares rather than to raise dividends.

As for the economy, it's certainly recovering, Cordaro went on, but part of that is due to corporations cutting expenses (especially by losing employees) and part is due to a pop in "deferred spending" — corporations are buying computers and such that they wouldn't buy last year.

In short, the economic recovery seems likely to slow down: "We really aren't healed that much."

I asked him how the new health-insurance regulations will impact the health-care market. His reply: "We're still studying it."

Finally, comparing 2009 to 2010, Cordaro said that last year you needed guts, not brains, to succeed; now you need brains, not guts.

Cordaro has been providing financial services since 1985. He holds a B.S. in economics, an M.S. in financial planning, and an MBA in finance. He has been an adjunct faculty member at Fairleigh Dickinson University and the County College of Morris.

In 2003, New Jersey Business Magazine named him to its listing of top business leaders in New Jersey in its Forty Under Forty category. He is past president of the New Jersey Chapter of the Financial Planning Association.

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