Fed moves may create volatility so investors need to keep their eye on ball
By John Grace
Originally published 04:35 p.m., July 16, 2013
Updated 05:08 p.m., July 16, 2013
While we are managing our personal economies by spending, saving and investing, the Federal Reserve is managing the entire U.S. economy. This is where the fight starts. The situation is not too different from watching the tennis players at Wimbledon.
The Fed wants you to spend more, particularly by taking out loans. From the Fed's point of view, the best thing to do is to buy a new home.
Many of us have other plans. We are trying to get our household balance sheets back to normal and save for retirement.
While you may be "fighting the Fed," understand that any potential change in Fed policy can affect your personal economy and your portfolio.
Lately the Fed has been in the news a lot. My job is to help you make sense of all the noise out there.
Fed Chairman Ben Bernanke recently announced that the Fed may begin to taper its quantitative easing program by the end of the year. In plain English, this means that the Fed might slow its easy-money program that has kept interest rates at very low levels.
This sent investors scrambling, causing a sell-off in the stock market. If interest rates rise, borrowing costs more, slowing an already sluggish economy. After watching the markets react badly to the tapering talk, the Fed quickly responded by holding a news conference to assure investors and clarify its position: Such action will take place only if the right economic conditions are met.
So why this recent announcement by Bernanke? According to the chairman, the economy is showing real signs of strength, making quantitative easing less necessary. He can cite the rise of home prices and recovery of the stock market to support his case.
But there are still cracks in the economic ship. According to a survey released by Bankrate.com on June 24, 76 percent of Americans live paycheck to paycheck with little to no emergency savings.
Unemployment hasn't been under 7 percent since November 2008 and is now 7.6 percent. The Fed can do what it wants to, and that's what scares the markets.
We may once again be entering new territory. Just as nobody knew what was going to happen with unprecedented amounts of monetary intervention by governments and central banks, nobody knows what will happen when these programs stop.
The immediate fallout from Bernanke's announcement indicates that we may see more uncertainty and volatility in the markets. The rise of the markets from the 2009 bottoms has been based on investors' knowledge that the Fed would print money and provide easy credit. With a Fed pullout looming, investors know assets and borrowing costs will have to adjust. This adjustment period means the markets may gyrate.
We knew this day was coming and have been talking about it for some time. We have formed a plan around these economic eventualities to help you achieve your goals of building wealth and economic security. We cannot change what the central bank does, but we can choose how we react to its policies.
Watching the tennis players at Wimbledon this month was very exciting. Not any different from watching the stock market recently with all of its volatility.
Tennis has a way of explaining what happens when a player hits a ball into the net, for example. You may know this is called "an unforced error" because the opponent didn't affect the game in any way.
Investors do the same thing when we are listless, distracted or even clueless about what we are doing with our life savings. Instead of being proactive and doing all things possible to avoid severe downside risk, if we have any money left we give ourselves a pass by calling it "a random walk on Wall Street" as if there were nothing we could have done to keep our life savings from going down like the Titanic.
Whether it's tennis or managing money, the best performers are the ones who are more consistent than volatile. It may take some assistance to build your financial plan and stay in the game despite volatility and uncertainty.
John Grace is president of Investor's Advantage Corp. in Westlake Village. He is a registered principal of National Planning Corp. and a master certified and charter member of HS Dent Advisors Network.
President, Investor's Advantage Corp.
Registered Principal, National Planning Corp.
Master Certified & Charter Member, HS Dent Advisor's Network
P.S. "Managing money is never left to chance. Win by losing less." - John Grace
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