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Most bond-fund managers do well when interest rates rise, but that’s no reason to invest with them

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Rising interest rates are not a good reason to invest in an actively managed bond fund. That’s important to know, since the performance data appear to show just the opposite. As you can see from the chart below, a far greater percentage of bond-market timing newsletters beat a buy-and-hold strategy during bond bear-markets.

This would suggest that if interest rates rise from current levels — causing bond prices to decline — then active management would be the way to go.

In fact, the data do not support this conclusion. In order to exploit this pattern, you would first need to know that interest rates are indeed headed up — that bonds are in a bear market, in other words. But if you already knew that, then you wouldn’t need to utilize the services of an active manager; your best course of action would then simply be to get out of bonds and go to cash.

Perhaps you think that interest rates will rise. I’m skeptical. I’ve been hearing such predictions for many years now, and at least so far they’ve not come to pass. If you were to unexpectedly get an interest rate prediction right, it would be more a matter of luck than skill.

This is the implicit message of the data in the accompanying chart. That’s because it takes no skill to outperform the market when it’s declining. Even a monkey flipping a coin to determine when to get in and out of the bond market would come out ahead.

If beating a buy-and-hold strategy in a bear market were a matter of skill, then you’d expect to see just as many market timers beating bull markets. But that is most definitely not the case: In bond bull markets, as the chart shows, the percentage of market timing newsletters beating the market is barely above zero.

To construct this chart, I examined bull and bear markets in the U.S. bond arena back to 1993. While there is no hard-and-fast rule about when bond bull markets begin and end, I defined them according to multi-month up- and down trends in the 10-year Treasury’s yield. By my count there have been five complete market cycles since then.

In the bull and bear phases of each cycle, I calculated the percentage of bond timing newsletters monitored by the Hulbert Financial Digest that had beaten a buy-and-hold. The accompanying chart reports the averages across all five cycles.

Why is beating a buy-and-hold strategy so much easier in bear markets?

The reason a monkey’s market timing would most likely beat a buy-and-hold during a bond bear market: When bonds are falling in price, odds are high that going to cash will gain an advantage over the falling market — even if the timing of going to cash is picked at random. So beating a buy-and-hold during a bear market is not a sign of any special ability.

During bull markets, in contrast, just the opposite will be true: Any time spent in cash will most likely cause a market timer to fall behind a buy-and-hold, which will be continuing to gain as the market rises. That’s why the majority of bond market timers look like geniuses when the market is falling and yet appear to have no ability when the market is rising.

This is simply a matter of probabilities, of course, and not unique to the bond market. Four decades of performance tracking by the Hulbert Financial Digest has shown the same phenomenon to be true among stock and gold timers as well.

Hardly any bond timers beat a buy-and-hold over an entire cycle

Another way to illustrate the very low probability of successfully timing the bond market is to measure how timers do over an entire market cycle. The picture that emerges from Hulbert Financial Digest data isn’t pretty. For each complete (bull-plus-bear) market cycle since 1993, I calculated the percentage of monitored bond market timers who made more money than buying and holding. On average for all market cycles since 1993, the market-beating percentage is just 8%.

This is slightly lower than the comparable percentages for monitored stock and gold timers, and I think that makes sense. Market timers thrive on market volatility, and the bond market is far less volatile than either equities or gold. Over the last several decades, for example, the monthly volatility of the U.S. Treasury market has been 65% less volatile than the stock market’s. Gold’s monthly returns have been 8% more volatile.

The bottom line: Be on your guard against arguments that bond market timing is about to be more important than ever. Though the data appear to support those arguments, in fact they do not.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: There will be a ‘huge boom’ in the second quarter of 2021 if vaccines are effective, says investment strategist David Rosenberg

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My husband doesn’t get along with my son. I brought most of the wealth into our marriage. How do I split my estate?

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Dear Quentin,

How do couples typically handle their estates in a second marriage? My husband and I have been married for seven years, and it is the second marriage for both of us. I have one adult child from my previous marriage; he has no children.

I brought the majority of our wealth to our marriage, including almost $1 million in my 401(k) and a nice home that is almost paid off; otherwise, we have no debt. My husband and I bought a second home together. We work hard to fund our new 401(k)s, and own a successful business together.

I am turning 65 this year, so estate planning is long overdue. My husband is five years younger than me, and we are both in very good health. We have two issues facing us: I see our retirement as living very comfortably on the monthly income generated by our 401(k)s, pension, Social Security, etc., and leaving whatever may be left to my son.


‘The other issue is that my husband no longer gets along with my dear son at all, and feels no obligation to get along with him.’

I am not interested in scrimping, but I want to be able to have enough money to last us until age 90 (or beyond) by not touching the principal. My husband is more interested in dipping deep into our savings, and living it up in retirement while we are young enough to enjoy it.

The other issue is that my husband no longer gets along with my dear son at all, and feels no obligation to get along with him, to the point that neither one wants anything to do with the other. As far as he is concerned, my son doesn’t meet his expectations, and so deserves nothing from me and certainly nothing from him.

I want my estate planning to be fair to both my new husband and my son. How do people typically handle this type of quandary? I think that I need to create some type of trust to pass on my share of our estate to my son. My pre-marriage assets involved my son as I pursued my graduate degree through night school and worked long hours throughout his childhood.

Second Wife

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com.

Dear Second Wife,

Don’t allow your husband’s feelings toward your son to influence your estate planning.

Your relationships with your husband and your son and your own plans for retirement are all fair game when making decisions about your estate, but your husband and son’s fractured relationship is their business, not yours. You worked hard for this money, and your son is your legal heir. Any effort by your husband to spend all of your savings and fritter away any inheritance that you intended to leave to your son should be resisted at all costs.

You have worked too hard your entire life to compromise your plans for a comfortable retirement where you have money set aside for long-term medical care insurance, unforeseen emergencies and/or your son. If you jointly own your home, you can leave your half to your son in your will, and specify it can only be sold after your husband passes away.

If you own the home, you can give your husband a life estate. Your son would pay capital-gains tax on the value of your home when he sells it, and not when you bought it. You could also make your son the beneficiary on your life-insurance policy, and/or gift him a certain amount of money per year to see how he manages and spends that money.

Figure out what is fair to yourself first before moving on to what is fair to your husband and your son. It’s OK to put your needs first. I caution against your dipping into savings at a rate that is beyond your own risk tolerance.

Ultimately, you are entitled to leave all other separate property to your son when you die — and, along with a financial adviser, set up a trust with that in mind for you, your husband and your son. Not necessarily in that order.

The Moneyist: ‘I cut his hair because he won’t pay for a haircut’: My multimillionaire husband is 90. I’ve looked after him for 41 years, but he won’t help my son

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 group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

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These money and investing tips can help you make a place for crypto in your portfolio

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Don’t miss these top money and investing features:

These money and investing stories, popular with MarketWatch readers over the past week, can give you a better understanding of bitcoin and other cyrptocurrency, and help you figure out if digital currency has a place in your portfolio alongside stocks, bonds and other traditional assets.

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