Big and Bigger Lies About Bond Fund Managers

Many investors, left on their own, will avoid pain at all costs. This actually ends up meaning they will sell low and buy high. Just the opposite of what they should be doing. Most of us cannot manage our own portfolio because of our emotions. We must have a prudent process in place and remain disciplined.

Different risk and return of investment for th...
Different risk and return of investment for the different investors (Photo credit: Wikipedia)

In times of economic uncertainty, investors tend to flee to the perceived safety of bonds. Let’s ignore the fact that bouncing from stocks to bonds is a form of market timing. As an investment strategy, market timing has a dismal record.Unfortunately, many investors want the returns of stocks, with the reduced risk of bonds. Those that are looking just for a safe haven invest in “risk free” bonds, like Treasury Bills.Most often, investors looking for higher returns from their bond holdings invest in actively managed bond funds (where the fund manager attempts to beat a designated benchmark, like the Barclays Capital Aggregate Bond Index). They could invest in lower management fee bond index funds of comparable risk, but they believe an active bond manager has the investment skill likely to increase returns over the benchmark index, while taking no more risk. They are paying more for the services of the active fund manager and expect to be rewarded.

The big lie is that actively managed bond funds are likely to outperform index funds of comparable risk. The bigger lie is that actively managed bond fund managers have demonstrable investment skill, permitting them to beat their benchmark index, net of fees.

Market timing does not work. Those that profess an ability to predict where the market is going are nothing more than confidence men. Investors will be best served by developing a prudent strategy with equities included and remain disciplined.

Please comment or call to discuss how this affects you and your financial future.

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