Predicting the future: 27-July-2010

I am an engineer by training.   It is in my blood to try to engineer a investment solution that gives good upside performance while structurally limiting risk to reasonable levels (e.g., no greater than the upside opportunity).   A few years ago I concluded that I had not figured out a way to do this, and that it is probably impossible.

For example highly rated bonds, usually not considered the riskiest of investments, are sensitive to prevailing interest rates.  AGG, a bond ETF is currently yielding around 3.7% annualized interest.  Its duration, a term that defines the average time until maturity for the bonds in the fund is around 4.    The duration metric quantifies how sensitive a bond investment is to interest rate fluctuations.

Read more