“To me, the biggest mistake I see clients make is, they want to be too short, and that's because they are defining risk by principal fluctuation,” he said, explaining that as a bond's rate or yield increases, a bond's price goes down.
“The bigger risk is that rates keep going down, choking off the client's income stream,” he added. “There is a big information gap with regard to fixed-income investing.”
Mr. Fox, who believes in actively trading bonds to maintain diverse exposure to the full range of durations, warns investors against the “knee-jerk reaction to hide in cash or short-term bonds because of the supposed inevitability of rising rates.”
He chides financial advisers for trying to oversimplify the fixed-income portion of a client's portfolio.
“A lot of advisers are still saying you should go to short-term bonds if you're worried about rates' rising,” he said. “Stringing together tactical decision after tactical decision is not a strategy.”
Diversity and flexibility are keys to getting the most out of a fixed-income portfolio, Mr. Fox. said.