The New York Time ran an article today titled When Smart Choices Are, Alas, Costly Ones. An excerpt:
“Since the spring of 2004, it has seemed eminently sensible for bond investors to concentrate on mutual funds containing bonds with short average maturities. That is because the Federal Reserve has been raising interest rates, and investors have been aiming to prevent the erosion of their principal. The Fed has raised its short-term benchmark rate in 11 quarter-point increments, to 3.75 percent. But in this case, being “right” has been costly. Elsewhere in the bond market, you could have made returns above the paltry, inflation-lagging 1 or 2 percent you were likely to have earned in short-term funds in the latest quarter and the year to date. Instead of rising in tandem with short-term rates, long rates actually fell after the Fed started raising rates. That pushed up prices and confounded almost everybody from ordinary investors to Alan Greenspan, the Fed chairman, who described the situation as a “conundrum.” Investors in funds holding bonds of intermediate and longer maturities did better; those who bought the conventional wisdom missed out. “It’s one of the rare times that we’ve seen interest rates rise and short-term funds actually underperform longer-term funds,” said Eric Jacobson, a senior analyst at Morningstar who specializes in bonds. It’s also a prime example of how even canny investors, who know enough to avoid predicting stock prices, fool themselves into thinking that they can profitably foretell the future of bonds. Even if their view eventually proves correct, the payoff may take far longer than expected.“
The reality is those so-called “rare times” are not so rare. Just like the impossible job of predicting the next devastating hurricane, predicting any market’s direction, in the short or long term, seems like a tough job to me. Why not wait for the market to show the way…and follow it?