So what can we take away from the year? Three important lessons for investors really stand out:
- The most important decision for any fixed income investor is how much interest rate risk they take on. You can make a lot of smart decisions, but if you get the rate call wrong it can undo everything else. If you are uncomfortable with that risk then don’t make any extreme interest rate bets with your portfolio.
- Forecasting the market environment is not just about market levels; sentiment also plays a huge role. With the Fed still very active with QE, what they say is in many ways just as important as what they do. Pay close attention to Fed messaging and how it evolves in 2014, because that could drive investor behavior and interest rate movements.
- Diversification is a two-way street. Yes, a diversifying asset can help moderate portfolio returns through time. However, by definition the diversifying asset should perform differently than other assets in your portfolio – meaning sometimes it will provide relatively positive returns, and sometimes it can drag portfolio performance. The latter was certainly the case for Treasuries in 2013. But over long periods, diversification can help produce higher risk-adjusted returns than a less diversified approach.
So what’s on tap for fixed income in 2014 and, perhaps more importantly, can I do a better job of predicting investment opportunities next year? I will cover this in my next post.
Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog. You can find more of his posts here.
Past performance does not guarantee future results. For standardized performance for HYG, click on the ticker above. Index returns are for illustrative purposes only. Indexes are unmanaged and one cannot invest in an index. Diversification may not protect against market risk or loss of principal.