Reminder: Nobody Can Predict Future Interest Rates (Especially the Experts)

The financial prediction industry is simply mind-boggling to me. There is zero long-term memory or accountability. You can make all the predictions you want about the stock market, gold prices, and interest rates, and nobody remembers your bad calls. You get a contrarian call right, and all of a sudden you’re on all the TV interviews and news articles.

Allow me to remind you of what the Wall Street Journal’s panel of economists predicted in January 2019 as to what interest rates would look like the rest of the year (WSJ source). I have updated the chart with the current rates (click to enlarge). This was less than 10 months ago!

Apologies for the sloppy graphics, but you can see that 10-year rates dropped down to 2% in July, down even further to 1.5% at the beginning of September, with a slight bounce up to around 1.75% today. Not a single prediction was even close to reality.

When I was stocking up on 4% APY 5-year CDs last year, I was reading comments like “Why lock in such a low rate? You’re going to see much higher rates soon!”. Now, all of the comments are “You better lock in that 3% CD before rates drop further!”

Predicting interest rates even only as far as the next 12 months, is incredibly hard. You can’t do it reliably. Nobody can do it reliably. You might get it right, but that is called luck and not skill.

Individual investors don’t have an advantage in predicting future rates, but they do have their own set of special advantages. As an individual investor, you can purchase certificates from any FDIC-insured bank or NCUA-insured credit union if the interest rate is better than the comparable US Treasury. Over the last couple of years, I was able to buy multiple 5-year CDs at 4% APY when the 5-year Treasury was well below 3%. You have to act decisively, but any individual can do it. Pension funds and other institutional investors can’t.

I have a ladder of 5-year CDs. Each year, I buy a 5-year CD when a compelling interest rate arises. I don’t care about the rate direction, as long as I get about 1% above US Treasuries. After 5 years of doing this, you will have a ladder of CDs such that each year one CD is maturing and you can simply reinvest the funds each year. If I managed to put one year of expenses into each rung of this ladder, I now have 5 years of expenses in the bank, fully-insured and ready to go in case of financial emergency. An extra 1% on each $100,000 is $1,000 a year. That’s real money.

If this sounds like too much trouble to open accounts at multiple banks, you can always still with a Total US Bond fund (like AGG or BND). You’re essentially buying an ladder of bonds. BND has an average effective maturity of 8 years and average duration of 6 years. You might also buy it automatically inside a Vanguard Target Retirement Fund. Just keep buying it and ignore any talk about “The Fed”. Keep the chart above in your mind.

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