Amidst the “panic”, “fear” and “tumult” in government bond markets, it can be difficult to keep a cool head. Short-term trading is easily conflated with longer-term considerations, and the prevailing narratives can quickly become hyperbolic and often apocalyptic. This is deeply unhelpful for most investors – what’s the best way to navigate such situations?

In spells of real or manufactured market stress, it is far too easy to lose sight of our own investment approach and the things that we consider important. Most typically this means long-term, fundamentally-minded investors being dragged into short-term thinking. 

I have found one of the easiest ways to uncover what an investor thinks is actually important (or to get them to focus on it) is to give use the crystal ball test. Ask: if you had to predict the performance of an asset class over a period of time and could see one market or economic variable in the future to assist you, what would it be?

We can use this approach to cut through a lot of the noise engulfing government bonds at the moment by asking something like:

• If you had to predict where 10 year US Treasury yields would be in five years’ time and could use a crystal ball to see one metric in the future, what would it be?

Would it be growth, inflation, the deficit, debt to GDP, the Fed balance sheet – or something else?

This obviously has nothing to do with actually forecasting the future, but is rather a way to focus on the things that should matter to us about the asset class under scrutiny.

It can also prove insightful to invert the question and ask: if you knew X in advance, would it help you predict the performance of the asset class? This is particularly helpful during times of market stress, where investors can veer dramatically from whatever their process should be and instead become wrapped up in whatever the market is obsessing over. (The next Treasury auction is probably not as critical as we think). 

It is amazing how much time market participants spend talking about issues that probably don’t matter to them given their approach and goals, and, even if they did, they couldn’t predict how they would unfold. This problem becomes particularly acute in stressed environments. 

Fundamentally-focused investors who care about quaint things like cash flow and coupons are incredibly vulnerable to getting caught up in the activity of short-term traders, because this is what drives markets in the moment. Finding ways to draw ourselves back to our own process and principles is vital.

The other piece of information that the crystal ball test can elicit is an investor’s real time horizon. If I were asked to predict Treasury yields over one month and over five years, the variables I would want to see in advance would be very different. Factors that might matter over five years, probably won’t tell us much over the next few weeks. (I am not actually sure what I would want to see in my crystal ball if I had to make weekly predictions).

One of the best way to understand an investor’s genuine time horizon is to ask them what they would most like to know in advance, and work back from there. If they want to see the next inflation print, they are probably not a long-term investor.

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While we cannot predict the future or forecast asset class behaviour accurately, asking ourselves or someone else what we would do if we could peek into the future can help to get the focus back to what’s important to us and away from lure of market noise.

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).