In its meeting on March 16, the Federal Reserve left the federal funds rate unchanged and indicated that there could be two rate increases between now and the end of 2016. Last fall, the indication was as many as four rate hikes in 2016—and the market rallied on that news, but Standard & Poor's 500-stock index is down slightly, as of mid March.
Those who believe monetary policy has been irresponsibly loose will no doubt say the most recent Fed announcement is setting us up for a potentially more painful day of reckoning somewhere down the line. Others will say that current economic and market conditions warrant caution on tightening the money supply.
In an article published on February 22nd, Mohamed A. El-Erian, former head of Pimco, said, "The market calm may be short lived." He lists three risks, any one of which he says could lead to a big drop in the stock market.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Former Dallas Federal Reserve President, David Fisher, said last week on CNBC, "We injected cocaine and heroin into the market [with quantitative easing], and now we are maintaining it with Ritalin… The Fed is like a big weapon with no ammunition left." These comments are remarkable, especially coming from a former fed governor.
Don't ignore these signs indicating that the economy and the stock market are undergoing a serious and fundamental change. I recommend that investors add a tactical component to their overall investment strategy. Tactical strategies, very simply, have a mechanism for reducing exposure as markets first become more volatile and then, decline. This isn't market timing. It is rules-based investing. And, it's not for an investor's entire portfolio—just the portion that you would like to protect. If you commit as little as one third of your investable assets to tactical strategies, it will improve portfolio returns significantly if we enter a bear market. If stocks continue to climb, you still have two-thirds of your capital benefiting from that increase.
It's important to note that tactical systems don't just protect investors from bad markets. To the contrary, tactical systems identify areas of strength and funnel capital in that direction. It is not, therefore, a decision to take a big chunk of your investable assets permanently off the table. Rather, it is adding another level of diversification to an overall investment strategy.
For more on my recommended tactical strategies, see How to Prepare Your Portfolio for the Worst.
Roger Davis is CEO of Woodridge Wealth Management, LLC. He lives in Los Angeles CA with his wife and two children.
-
Rally Fades on Mixed AI Revolution News: Stock Market TodayAll three main U.S. equity indexes opened higher but closed lower as a seven-session winning streak for the S&P 500 came to an end.
-
Stretch Your Holiday Shopping Budget Further with These Under-$50 Gifts That Don't Feel CheapAmazon October Prime Day is the perfect chance to nab some under-$50 gifts that feel more expensive than they are (because normally they would be).
-
The Spendthrift Trap: Here's One Way to Protect Your Legacy From an Irresponsible HeirA spendthrift clause in an estate plan can protect an inheritance from a financially irresponsible child's debts and poor decisions.
-
Adapting to AI's Evolving Landscape: A Survival Guide for BusinessesLike it or not, AI is here to stay, and opting out could be disastrous for your organization. Instead, focus on what you can control and be flexible, as AI is still evolving.
-
Striking Gold (or Gas): A Financial Pro Unpacks the Nuances of Energy InvestingInvesting in the energy industry, particularly oil and gas, involves understanding the facts about how projects generate returns through cash flow and long-term asset building, while also being aware of the risks.
-
Escaping the New Golden Handcuffs: A Financial Expert Has a Plan for Today's ExecutivesFeeling stuck in your job? It could be your complicated compensation package, but it also could be where you live, your family or even how you view yourself.
-
I'm a Financial Planner: Here's How to Invest Like the Wealthy, Even if You Don't Have MillionsPrivate market investments, once exclusive to the ultra-wealthy and institutions, have become more accessible to individual investors, thanks to regulatory changes and new investment structures.
-
Four Ways a Massive Emergency Fund Can Hurt You More Than It HelpsSaving too much could mean you're missing opportunities to put your money to work. Redirect some of that money toward paying off debt, building retirement funds, fulfilling a dream or investing in higher-growth options.
-
I'm a Financial Planner: How to Dodge a Retirement Danger You May Not Have Heard AboutTiming is everything, and sequence of returns risk can mean the difference between a retirement nest egg that's overflowing … or empty.
-
Caring for Aging Parents: An Expert Guide to Easing the Financial and Emotional StrainEarly conversations, financial planning and understanding the progression of care needs can help to mitigate stress and protect family relationships.
