Greenspan has been taking a tougher tone on inflation lately. When he says, "Maybe I'll be more vigilant," what does that say to you? The bond market has accounted for 75 and possibly 100 basis points of tightening already. But if business remains robust and employment remains strong, is it possible that the Fed could raise [rates] 100 to 150 basis points in the next year? It could happen.
What does that mean for your investment strategy? If you go out four, five, or six years and interest rates tighten substantially, you're going to have a negative total return. What's the sense of that? I'm buying bonds due in 2005 and '06. It's a safe place to put money without worrying about the vagaries of the market. Shorter is better right now.
Why do you prefer to use individual bonds rather than mutual funds or exchange traded funds? If I buy an ETF and hold it, in three years what am I going to get for it? If I buy a three-year bond, I know what I am going to get.
How about stocks? Right now, your risk-reward ratio is more favorable in large-cap equities than in bonds. If you put money into stock indexes, you could be looking at 8% to 9% total returns, maybe even 10% for this year. We've also been writing out-of-the-money covered calls on large-cap, dividend-paying blue chips. This adds a nice yield engine to the portfolio. When the market is not on fire, this has been a very good way of adding value.