You need to stop worrying about what the Federal Reserve is going to do next. It’s most probably just making you anxious.
This advice might seem to be at odds with the hullaballoo emanating from TV business news where some commentators think that the Fed’s next utterance is the be-all and end-all.
For some people, watching the Fed is rightly an obsession. But such individuals are frequently employed in roles managing tens of billions of dollars of money, and where nuances in the Fed’s actions may mean the difference between a profit or a loss which can often be counted in millions.
Most of us aren’t in those jobs. Here’s some detail on why it mostly doesn’t matter what the Fed says or does.
The Fed’s actions are well telegraphed. In the first place, you likely won’t be surprised by what the central bank does.
“In the immediate term the Fed is taking great pains to telegraph what they are going to do,” says Sinead Colton, head of investment strategy at Mellon Capital in San Francisco. “A quarter of a percentage point move in interest rates when it is well-telegraphed doesn’t make that much difference to small investors.”
[See: 10 Skills the Best Investors Have.]
Janet Yellen, the chair of the Fed, is bending over backward to make sure that investors won’t be surprised by any changes in interest rates. The Fed also seems to be signaling that it will increase interest rates in quarter-point increments, at least for the foreseeable future.
That means investors are being careful to include the likely changes in the cost of borrowing into what they pay for stocks. Or more simply, stock prices have already moved in anticipation of what interest rates will likely do in the near future.
The current situation is a world of difference from when Paul Volker was chair of the Fed and communication was limited, to say the least. Likewise, when Alan Greenspan took on the role, he appeared to speak in riddles that needed decoding by professional prognosticators. Not so, now. When the Fed speaks, it’s largely in plain English.
Rising interest rates aren’t always bad. “Actually, as long as inflation isn’t out of control, interest rate increases tell you that the economy is growing,” Colton says.
In general, a growing economy is good for profits and hence better for stocks. Of course, none of that will stop TV producers getting excited.
Media extravaganza. “It’s just a media exercise,” says John Tamny, author of “Who Needs the Fed? What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America’s Central Bank.”
[See: 7 Stocks That Soar in a Recession.]
He’s referring to the theatrics surrounding every statement or policy action from the Fed. He says the spectacle is little more than a sideshow and doesn’t reflect much of what matters to the economy or the market.
“The massive cuts in interest rates when the 21st century began saw no corresponding stock market rally,” he says. “And the Fed was hiking rates when the market went up in 2007.”
Likewise, the banking system isn’t behind every piece of economic growth. In his book, Tamny uses the example of Hollywood and the decisions to invest in producing some movies and not in others. Whether the Fed changes interest rates by a quarter of 1 percent makes little difference in that case. Yet in the U.S., movie business is by far the most successful of any in the world.
His point is don’t overestimate the central bank’s influence in the broader economy or over the markets.
Unless you are a sophisticated investor. Not everyone buys the idea that the Fed should be ignored.
“The Fed is setting monetary policy, which is a fundamental block of the economy,” says Stephen Wood, chief market strategist at Russell Investments in New York. “It’s one of the things that investors should pay attention to.”
That is certainly true for sophisticated investors such as Wood. Knowing whether monetary policy will be tight or loose can help savvy investors decide which sectors of the economy will perform better and which will lag. That’s useful stuff, but it requires deep knowledge that most individual investors simply do not have.
How should small investors act? Historically, individual investors trade securities at exactly the wrong periods of time. That is to say, they buy when prices are high and sell when prices are low. That’s the exact opposite of the investing maxim, buy low, sell high.
Most individuals would be better off ignoring the temptation to trade and forgetting the commentary on the Fed. Instead, focus on maintaining a well-balanced portfolio of stocks, bonds and other assets.
[See: 11 Ways to Buy Bank Stocks.]
An ideal starting place for a balanced portfolio is to hold around 30 percent in bonds and the rest mainly in stocks. For long-term investors, the percentage of cash should probably be small.
More from U.S. News
20 Awesome Dividend Stocks for Guaranteed Income
6 Things to Know About Mark Zuckerberg’s Manifesto
7 of the Best Cheap Stocks to Buy Under $10
Stop Watching the Fed’s Every Move originally appeared on usnews.com
