Success Can be an Illusion

My account here is doing better than my account there.

First, are you comparing apples to apples? One account is invested in the S&P 500, the other is in a target fund during a bull market. Of course, one is doing better than the other during a raging bull market.

Ok, fine then. But what about funds tracking a benchmark? Surely, that must be a valid comparison. 

Well, not quite - you may be falling for misleading marketing. From Jason Zweig:

"The numbers sound amazing: Over the past year, 75% of fixed-income funds outperformed the Bloomberg U.S. Aggregate Bond Index, a standard benchmark for bond portfolios. What a contrast to U.S. stock funds, where only 40% beat the S&P 500 over the same period.

Does this mean most managers of stock funds are dimwits while most bond-fund managers are geniuses? Nope. The Aggregate bond index, nicknamed “the Agg,” is a flawed measure of performance for many of the funds that brag about beating it.

Among 2,726 fixed-income mutual funds and exchange-traded funds tracked by Morningstar, 1,229 use the Agg as their primary benchmark. 

The Agg consists entirely of investment-grade bonds, with approximately half its market value in Treasury securities, another quarter backed by U.S. government agencies and most of the remainder in high-quality corporate debt. Most mature in 10 years or less.

Relative to the Agg, many bond funds have been taking way more credit risk, more interest-rate risk—or both. That’s made their trailing performance look great relative to the Agg. In this new, higher-rate market environment, though, those riskier strategies could go sour.

Even so, many funds that zig when the Agg zags still compare themselves to it."

At our firm, we typically buy bonds for income and safety - most commonly to manage sequence of return risk during decumulation. We usually do so by buying individual government and corporate bonds that mature on the timeline that our clients need the income.

When evaluating performance - record keeper to record keeper. Custodian to custodian. Account to account. Advisor to advisor. Fund to benchmark. Just make sure it's a fair fight.

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^{Source: Don't Fall for Bond Funds That Say They're Beating the Market (WSJ)}

^{The content in this article was prepared by the article’s author and is not intended to provide specific advice or recommendations for any individual. Voya Financial Advisors does not endorse its content, and the views expressed may not necessarily reflect those held by Voya Financial Advisors.}