The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website

Chapter 14

Investing in Fixed Income

Fixed-income markets—bond markets—tend to be efficient, meaning that it is difficult for any manager to produce sustained outperformance. They tend to be low returning, net of inflation, meaning that there is little wealth-creation potential to be had in the sector. Finally, they tend to be “boring,” with little in the way of the spectacular peaks and valleys that characterize equity markets.

Instead, fixed-income markets tend to follow broad secular trends as interest rates rise over the course of many years (the 1970s, for example), then decline slowly over the course of many more years (the 1980s and 1990s, for example). As a result, we might expect to find that investors have such markets well in hand and that we can safely focus our advisory attention on the gamier equity side of client portfolios.

In fact, however, my experience is that investors tend to make at least as many mistakes on the bond side of their portfolios than they do on the equity side, probably because, for the reasons just mentioned, investors don't pay enough attention to fixed income. Granted, mistakes in bond portfolios tend to be less disastrous for investors than mistakes elsewhere, but foolish deployment of our capital is always harmful to our wealth, whether the harm occurs in brief, spectacular fashion (as with equity mistakes) or slowly and largely invisibly (as with bond mistakes).