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Gundlach: This Low-Risk Investment Mix Could Earn 7% Returns

By Dinah Wisenberg Brin

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What You Need to Know

  • Jeffrey Gundlach, who specializes in fixed income, recommends allocations of only 25% to stocks now.
  • The rest should be split among long Treasury bonds, high-quality fixed income investments and commodities, he suggests.
  • He warns against buying the handful of stocks that have fueled the market's recent rise.

Jeffrey Gundlach, DoubleLine Capital founder, CEO and chief investment officer, recently recommended that investors adopt a relatively low-risk portfolio with significant fixed income allocations and limited equity exposure.

The allocations he recommended could yield about 7%, keeping investors ahead of inflation, Gundlach said on a UBS podcast recorded last week.

“Investors should be getting much more conservative, and I continue to favor a relatively balanced portfolio. When I say that, I don’t mean 60/40,” he said, referring to the traditional 60% stock, 40% bond portfolio. “I mean only about 25 or 30 percent equities and the same quantity or slightly more of bonds.”

Gundlach, known by some as the “bond king,” said his suggestions — a roughly 25%–25%–25%–25% portfolio — represent the allocations he favored about two years ago.

Specifically, Gundlach suggested a 25% allocation to 10-year and longer Treasury bonds, which he said could provide portfolio ballast; investors could reach 30% gains or higher on the 30-year bond and about half of that on 10-year bonds, he added.

He also recommended 25% in “cash-ish” holdings — other very high-quality fixed income investments, such as a low-duration bond fund, the DoubleLine Commercial Real Estate ETF (DCMB) or double- or triple-B fixed income, such as double-B floating-rate bank loans; or very high-quality commercial mortgage-backed securities.

Double- or triple-B fixed income can yield 7.5% or 8%, Gundlach said.

Gundlach said he was no longer interested in low-quality bonds, as he was about a year ago, and supports having “some risk” but not high-risk investments.

The investment chief suggested allocating 25% to stocks, but not to the seven that have driven the S&P 500’s gains year to date. Investors might want mid- or large-cap value over growth stocks as well as some non-U.S. stocks, Gundlach said, adding that he’s not fond of Europe or emerging markets now but is a long-term “big believer” in India.

Stocks are very overvalued now, a mirror image to their position in 2022, when they were undervalued relative to bonds, he said. It’s hard to be fond of the stock market’s valuation now, according to Gundlach, who expects a recession in the first half of 2024 and layoffs to pick up in late 2023 or early 2024.

Gundlach also likes commodities for the first time in a long time after being on the defensive for a couple of years, and recommended allocating 25% of the portfolio to them, specifically gold or the Bloomberg Commodity Index (BCOM), which he said recently crossed its 200-day moving average.

With these allocations, investors can develop an income-producing portfolio without much risk, Gundlach said. “You put it together and you get like 7%.”

Regarding the U.S. economy, Gundlach said he expects consumers to be “tapped out” in the next six months, noting they’ve been over-borrowing, and expects interest rate increases to start biting consumers and small businesses.

He noted he’s been advising everyone that when the yield curve starts to de-invert, it’s a very good real-time recession signal.

Photo: Bloomberg

Dinah Wisenberg Brin

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