It was almost a good week. The market slid into Wednesday, and then got a pop from the Federal Reserve. On Wednesday, Federal Reserve Chairman Ben Bernanke was testifying before Congress and indicated that the door on additional stimulus, via bond purchases, was still open. The stock market briefly took off on this news, but trailed off by days-end. Thursday was welcomed with more from the Fed Chairman; this time though, the Bernanke stated that there are no plans at this point for more bond purchases. Just like any other pseudo-celebrity who speaks off the cuff must sometimes recant, so too does the Fed Chairman. It appears a realization must have set in at the Fed that they may have said too much.
I think there are a few telling items from this past week’s events at the Fed. First, it’s clear that their central planning is a huge driver in the market. Second, why would the Fed want to pour cold water on the market’s positive reaction to the hint of further stimulation Wednesday? Could it be (as I have hinted before) that the Fed would rather see the market to go down so they can be asked back into bond purchases? Could it be that they are already regretting the halt of bond purchases at the end of last month? The reality is consumer confidence has fallen off a cliff, unemployment is ticking up, and a myriad of other economic factors are pointing to significant weakness in the economy.
With the markets, buying a balanced portfolio of some stocks and bonds is not going to grow and protect wealth in a portfolio like it once did. Consider:
- For a long time, gold and silver were considered relics, and not worthy of being a part of an investor’s portfolio.
- Over the last 20 years, interest rates have been in a slow glide path down, making bonds very attractive investments both in good times and bad. It now looks like rates of zero percent will not last for long, and this will turn many types of bonds into much riskier assets than they once were.
- Over the last 40 years, the dollar (while slowly being destroyed) has held up as THE safe haven in scary times. This is not true over the last few years; we can see that gold has risen while the dollar has lost ground.
- Emerging markets were once the backward nations full of economic and political risk. Today, we find that countries like China, Brazil, Chile, South Africa, and South Korea (to name a few) are running economically viable, and politically stable, countries. It would seem the indebted U.S. is the politically troubled economic backwater.
You can see the face of the world is changing, and to be sure, investors’ approaches will have to be more tactical, nimble, and fluid to adjust to the new environment. Continuing to use outdated strategies in your portfolio is dangerous; you must utilize the right investments for the current times.
Do you have an investment strategy that seeks to protect your portfolio against volatile economic conditions? Call me to schedule a free review of your current investment portfolio – 913.693.7918.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.