The Biggest Mistake Income Investors Can Make

Why It Matters

Focusing on yields rather than past returns helps investors set realistic expectations and avoid misallocating capital based on transient performance spikes or troughs; it promotes more predictable income outcomes for portfolio planning.

Summary

Justin, a fixed-income veteran, warns that income investors often overemphasize past performance when assessing bond funds. He argues that unlike equities, fixed-income returns are driven primarily by the income stream captured in the fund’s yield-to-maturity, which more reliably indicates expected returns over the recommended holding period. Historical yearly returns—whether 2% or 8%—are less informative than the current yield the fund is offering. Investors should therefore prioritize yield metrics rather than past performance figures when evaluating bond funds.

Original Description

"It does what it says on the tin" is not a phrase you can always evenly apply across asset classes, but fixed income is arguably the exception.

In this clip for Livewire's Income Series, Daintree Capital's Justin Tyler explains why the disclaimer "past performance is not indicative of future performance" means something more straightforward in fixed income, and why that can be a good thing for investors.