Interest rates
Flickr user 401(K) 2012
The fourth prediction was to avoid all but short-term fixed income investments because interest rates were set to rise significantly. Interest rates continued to defy the bond gurus, as yields fell across the yield curve:
- The five-year Treasury yield fell from 0.89 to 0.62.
- The 10-year yield fell from 1.97 to 1.65.
- The 30-year yield fell from 2.98 to 2.82.
As a result, investors who listened to the forecasts that rates just had to rise have not only missed out on the term premium, but also on the opportunity for significant capital gains. Just as a blind squirrel will occasionally find an acorn, one day a rising rate forecast will turn out to be true. With this incorrect forecast the sure things are now batting .500 -- 1 for 2 with two draws.
Image courtesy of Flickr user 401(K) 2012
Next: Investing in China
And your point is?
The markets know this is true and all available information is built into prices, including the possibility of unforeseen events, the known unknowns and the unknown unknows if you will. Prices include estimates of events happening or not and then they basically instantly adjust when we know the outcomes.
The investor's focus then should not be on trying to manage returns, which cannot be controlled, but on managing the amount of risks you take, diversifying those risks as much as possible, keeping costs low and tax efficiency high.
Unfortunately the vast majority of investors focus on trying to manage returns, the one thing we cannot control. They end up playing a loser's game.
Best wishes
Larry