No. of Recommendations: 1

Thanks for the offer to dig up the research, but no need to do so, now that you explain that the guessers were given three choices, not just two. Also, I strongly dislike Vanguard and think nearly everything they publish under the guise of "research" is mostly a self-serving infomercial designed to win converts to indexing [which might be a viable strategy in a bull market but is poor religion when things turn downwards and not my cup of tea.]

As for most bond managers consistently making the wrong bets about interest rate, I'd quarrel with that and say instead that it is most investors who make the wrong bets by throwing money at bond funds near their tops, forcing mangers to put excess cash to work at the very worst time, and then panic when things get tough and yank their money out of the fund at market bottoms, forcing managers to make untimely redemptions.

From what I read in their reports and hear from them in their interviews, I'd conclude that most bond managers know their market well, love what they are doing, and are smart, tough investors. I would be very hestitant to bet against them if just the two of us were put into an investing/trading contest over a representative timeframe and asked to invest/trade for our own accounts, especially if they still had access to their research and trading departments, which are serious advantages that the typical retail bond investor/trader can't ever match. What kills the performance of bond funds is investors and their bad timing, not the judgment of the managers. Fund managers have the nearly insurmountable handicap of having to put money to work at the worst time and must make redemptions on demand. That's what kills their performance and makes them so easy to beat.

And, yes, is it easy to beat them. On a personal note, I'm 90% in junk in a $250,000 (face value) bond account and E*Trades reports that I'm up ~28% year to date. Brilliant? Not likely. Lucky? Yes, because I don't have to deal with investors and can hold to maturity if and when I have to, meaning I can ride out downturns and wait for a workout from the bankruptcy courts when issues default on me, as they will if the reward/risk envelope is being pushed. That's the advantage a small investor has over the big boys,they can choose their issues and time their trades, and why people, if they are inclined and it is appropriate to their investment skills and objectives, should buy their own bonds rather than depend on funds. The conventional wisdom is that one should have $50,000 to work with if one wants to buy his or her own bonds, which I think is self-serving nonsense on the part of the fund companies who are the chief beneficiaries of such an arbitrary entry barrier.

IMHO, $50k is both too much and too little, depending one what one is attempting to do, but self-directed bond investing is both very doable and a lot easier than stock investing and just as profitable, whether or not one can predict interest rates, which is where this thread began. And if anyone is looking for some fat and virtually safe returns from bonds, simply wait patiently until the Fed goes on a raising tear again to cool an overheating economy. Buy a ton of the 2 and 5 year notes, then wait patiently until the Fed overshoots and the economy tanks and the Fed reverses itself and rates bottom out. Then sell. You'll capture a fat coupon plus fat capital gains for a total return of 15% upwards, which isn't bad for a nearly risk-free investment. This is a nonce trade, not an everyday event, that happens every 4-5 years or so. But it is indicative of the fixed-income opportunities that exit for the patient and the prepared.

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