The Value of Interest Rate Forecasts
As bad as the evidence is on active equity managers being able to outperform appropriate benchmarks on a risk-adjusted basis, the evidence is much worse for active bond managers. One reason for their failure is the inability to forecast interest rates more accurately than the market itself. The following tale is just another example of why there are only three types of interest rate forecasters:
- Those that don't know where rates are going.
- Those that don't know they don't know.
- Those that know they don't know but get paid lots of money to pretend they do.
While the forecasts clearly turned out to be wrong, it doesn't mean the experts were incompetent. The point is that even the most talented analysts are unlikely to make reliable predictions. You shouldn't focus on endeavors that are likely to prove unproductive at best and counterproductive (because of the time and expenses incurred in the effort) at worst. Instead, focus your efforts on the things you can control:
- The amount of risk you take
- How well you diversify your risks
- Costs
- Tax efficiency
For further reading on the failure of active bond managers: