Rate Forecasting: Just Ask the Magic 8-Ball!

by Pat Luby

8_ball_faceTo the list of surprise factors that can affect the bond market, we’ll have to add comments from the ECB. Of course, the list of bond market factors is endless–and growing! New factors will always be just around the corner. If you are determined to try to time interest rates you will need to forecast how much and when rates will move. Being correct on both is very difficult–even for the most experienced full-time professionals with significant resources and research support. Ask Bill Gross about that and his trade on German bunds. For most investors, having an “opinion” about the direction or magnitude of changes in interest rates has as much analytical rigor as asking the Magic 8-Ball.

This is not to suggest that investors should ignore the prevailing winds or forecasts, but is meant to reinforce the idea that your goals cannot wait on the markets. Know what your goals are (ideally by having a financial plan or investment policy statement) and then select the individual investments that make the most sense–given the market conditions and trends. Don’t make an asset allocation decision instead of a security selection decision. If the market volatility is too much, consider delegating your decisions to a professional manager. By the way, if you don’t have a Magic 8-Ball handy, Wikipedia has a handy list of all of the 8-Ball possible answers.