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I’m going to start this month’s note with a tweet I sent out:

“While working on an article for the November AAII Journal, I came across a short-term bond fund w/ an expense ratio of 0.95%.

First thought: Is the data right? A: Yes, it is.

Second thought: Pray tell, why does a fund w/ limited capital appreciation have a 0.95% expense ratio?!!”

The fund in question is the New Covenant Income Fund (NCICX). And, yes, its stated expense ratio is 0.95%.

Cost, in this case, needs to be considered in context. The fund invests in government and corporate bonds. Six of its 10 largest holdings are Treasuries. Government bonds account for 38% of the total portfolio. The effective duration—a measure of interest rate sensitivity—is 3.25 years.

Any way you slice it, the cost for what you are getting is high. There are comparable mutual funds and exchange-traded funds (ETFs) with lower expense ratios, as you can see in this issue.

None of this is to suggest that you should own or should avoid short-term bond funds. Rather, I am pointing this fund out to show the potential perils of making investment decisions based on yield alone. The higher stream of income may come with higher expenses, higher volatility and/or a loss of capital. Certainly, if the yield seems too good to be true, grip your wallet tightly.

And don’t ignore the cost, either. The higher the cost of ownership, the lower the return you will realize. AAII president John Bajkowski demonstrates this in his AAII How-To article. In it, he shows where on AAII.com you can find information about a fund’s expense ratio.

I personally came across the New Covenant Income fund while using the mutual fund tools on AAII.com. We’ve added a lot of new features and made many improvements to our website over the past year. A number of AAII members are taking advantage of them. I encourage you to do the same.

Yields, of course, are a bigger subject of conversation than expense ratios. What happens to interest rates and bond yields going forward depends on the economy. AAII Journal contributing editor Brian Haughey shares which metrics he thinks are most worth paying attention to. They include gross domestic product (GDP), jobs data, retail sales and durable goods orders.

Haughey also offers suggestions for tactically applying economic trends to investment ideas. You’ll notice that he uses the words “overlay” and “tilt” when doing so. There are certainly opportunities to adjust an allocation if your strategy calls for doing so. The danger is when you let your assessment of where the economy is headed lead you to make significant changes to your portfolio’s allocation.

An example is this month’s election. Ahead of it, some of you might have had expectations for what would happen to the economy if a certain candidate won. It’s easy to find a pundit who will offer up their opinions—including ones that agree with your viewpoint. Yet, events often unfold over a given president’s term that were not predicted at the time of the election. The same may be likely over the forthcoming presidential term.

Since Election Day is two weeks away as I write this, I won’t say anything about the outcome. What I will say is that there has been a long-running link between a person’s political affiliation and their views of the economy. Gallup polling data shows Democrats having a more favorable view of the economy when a Democrat is president and Republicans having a more favorable view of the economy when a Republican is president.

It’s not always easy, but when looking at economic data, it’s best to put your biases aside. At the same time, check your ego. The person who can cite economic data by memory isn’t necessarily a better investor. In fact, if their knowledge leads them to be overconfident their returns tend to be worse. Those who use economic data to their advantage have a systematic approach for incorporating it, check their egos at the door and avoid making big bets on events with uncertain outcomes.

Finally, everyone at AAII wishes you an early happy Thanksgiving. We appreciate you being a member.

Wishing you prosperity and good health,