The headline above comes from Bloomberg this morning. The article goes on to say:

“Inflation and rates, especially as a bond investor right now, is the call that you have to make,” said Elaine Stokes, fixed income portfolio manager at Loomis Sayles. “It’s the make-or-break call of your year.”

After 30 years of lowering interest rates and inflation, heaven for bond investors, we may start to see both rising this year. Or we may not. If you are still a believer in the 60/40 portfolio and your bond fund or ETF is an index fund (or an index fund masquerading as an actively managed fund), then what happens with inflation and interest rates is vital. They go up and you likely lose money. They go down and you likely make money. For active managers this is the call of the year. You time the market right and you can do well. Time it wrong and not so good.

So as an investor what do you do? Pick indexed bond investments and hope interest rates and inflation decline? Or pick active bond investments and hope you find the bond manager who can time the market? The answer should be neither. You shouldn’t be passive and let the market dictate what happens to your portfolio. Nor should you expect anyone to be able to consistently time the bond market. The answer is agility. React to what the bond market is telling you and tilt your portfolio accordingly.

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