Why invest in bonds? The simplest reason, to borrow a phrase from Willie Sutton, is because that's where the money is. Both U.S. and world bond markets exceed their respective stock markets by a factor of approximately 2 to 1, according to research from the Asset Allocation Advisor. Marilyn Cohen, founder and chief of investment strategy at Envision Capital Management in Los Angeles, is a passionate partisan of bond investing. "Bond managers are so tired of hearing that stocks will outperform bonds two to one over the long haul," she says. "This truism sure didn't work in the last 10 years, when the real total return of the S&P index was -3.4%. That's why bond managers have so much business nowadays."

Cohen started her career as a bond broker at Cantor Fitzgerald, where she worked for 14 years. She then started and sold her own bond brokerage before launching Envision Capital Management in 1993. With the help of one other portfolio manager, and an operations and compliance officer, she manages more than $275 million in fixed-income portfolios for 180 clients.

Most of Cohen's clients' portfolios are 100% bonds; less than $1 million of the assets she manages are in a master limited partnership and high-dividend-yieding stocks. Her average account size is $1.75 million and her largest single account is $30 million. Cohen does not manage institutional accounts. Her business strategy is simple: She creates portfolios of individual bonds for individual investors who seek current income and wealth preservation. Most are retirees.

Cohen has built her business by writing and speaking. She is the author of two books and a monthly newsletter, Tax Advantaged Investor, as well as a column for Forbes magazine, where she's been contributing for 15 years. She now speaks at the MoneyShow and makes frequent television appearances, always taking the part of the individual bond investor. During the credit crisis, U.S. News and World Report called her "the bond guru." As a result of her public profile and consumer advocacy, she says, the clients keep coming.

BONDS NOW AND ALWAYS

Cohen acknowledges that buying individual bonds for clients is more work for financial planners than buying equities, but this extra effort is well spent. She specifies three advantages in particular: (1) preservation of capital through predictability of maturity and call dates; (2) predictability of the client's income stream; and (3) in today's investment climate, protection against the inevitability of rising interest rates.

What?

Expounding on the third reason, Cohen quips, "There is nothing wrong with bond funds other than the time you get in and the time you get out." Now is clearly the time to get out, she explains: "Most planners have never lived through a bear market in bonds. With constantly declining interest rates since the highs of 1981, we are approaching the end of a 30-year bull market in bonds."

Whereas bond funds will suffer a drop in NAV when interest rates rise, individual bonds, held to maturity, will eventually be redeemed at full face value, and are therefore protection against the vagaries of the market. Cohen recommends advisors move clients out of bond funds into individual bonds posthaste.

SAFETY FIRST

Not that Cohen is timing the bottom. She avoids derivatives like the plague and recalls how, in 2009, Harvard University had to pay more than $900 million to terminate swaps that assumed interest rates would rise. She adds, "If you don't move your clients into individual bonds, at least shorten the duration of their bond funds as much as possible. When the bond market turns, your clients' loyalty to you will be total."

Besides the approaching end of the bond bull market, another reason for individual bonds is the aging of the average planner's clientele. Baby boomers will need predictable income for retirement and Cohen recommends a diversified portfolio of individual bonds as the safest route to that end. She emphasizes safety first, diversification second and yield third.

Chasing yield through junk bonds, high-dividend stocks, hedge funds and fixed-rate annuities is the surest path to disaster. "The only beneficiaries of fixed annuities," she says, "are the people who sell them." Cohen advises retired clients of modest means (say a home and a $1 million portfolio) to tighten their belts, invest in a laddered strategy of intermediate bonds maturing every year for 10 years, and use their home as their inflation hedge.

HOW TO BUY BONDS

Recommending the safety of bonds does not imply that all bonds are safe. To the contrary, bond markets are even more treacherous that equity markets. Nowhere is the warning caveat emptor more applicable. The recent credit crisis has shown that advisors cannot put their clients' fixed income portfolios on cruise control.