Bonds Are Not Forever: The Crisis Facing Fixed Income Investors

CHAPTER 9

BONDS ARE NOT FOREVER

Putting It All Together

In 2011 I wrote The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True. I explained how hedge fund investors had done quite poorly out of their hedge fund investments—not all investors, but in aggregate and certainly most of them. The early success of hedge funds drew in more capital than they could manage, and so the returns went down. Investors would have been better off owning Treasury bills. The returns for clients had been a mirage, although enormous wealth was created for hedge fund managers and those who guided the investors to them.

Calling this book “The Bond Mirage” would be wrong. Bond investors really have done very well. Bonds outperformed stocks during the first decade of the millennium, and the buyer of a 30-Year Treasury bond at the peak in yields in 1981 also outperformed equities during the subsequent 30 years. Bonds have largely done what they’re supposed to do, and following the equity market collapse of 2007–2008, it’s hardly surprising that their popularity has never been higher.

Past performance is no guarantee of future returns, as the familiar disclaimer on investment products warns. Buying what’s been going up, which is called momentum investing, feels more comfortable than buying what few others want. Humans are social creatures, and most would rather find reasons to agree than hold a minority view. Successful investing requires looking forward. History is relevant, though ...