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.
-
Ask the Editor — Tax Questions on the SALT DeductionAsk the Editor In this week's Ask the Editor Q&A, we answer questions from readers on the OBBB's changes to the SALT deduction.
-
Greed, Fear and Market Volatility: A Financial Adviser's Guide to Keeping Emotions Out of Investment DecisionsDon't panic! And don't be so confident in the stock market that you overlook risk. Instead, be logical. Your retirement security could depend on it.
-
Greed, Fear and Market Volatility: A Financial Adviser's Guide to Keeping Emotions Out of Investment Decisions
Don't panic! And don't be so confident in the stock market that you overlook risk. Instead, be logical. Your retirement security could depend on it.
-
Want a Financial Adviser Who Shares Your Faith? Look for One With a CKA DesignationFinancial professionals with a Certified Kingdom Advisor certification are committed to integrating biblical principles with sound financial advice.
-
10 Ways to Stay Safe From Grandparent Scams and Other Fraud, Courtesy of a Financial PlannerScams are increasingly hard to detect, and anyone can be fooled, from older people to educated professionals. Here are 10 ways to avoid becoming a victim.
-
This Is How the Student Loan Bubble Is Primed to Pop, From a Student Funding ExpertFueled by easy money, inflated tuition and high default rates, the student loan bubble mirrors the 2008 subprime mortgage crisis. We could be headed for a potential financial collapse. What can we do?
-
More Than Money: The Hidden Toll of Financial Abuse of Older AdultsFinancial abuse from schemes involving tech support, government impostors, false sweepstakes, grandchild hoaxes and online shopping issues can cause thousands of dollars in losses.
-
I'm a Financial Planner: Here Are Three High-Impact Ways to Make a Difference With Your DollarsThe world often feels out of control, but here are three ways to use your money — through investments, charitable giving and political donations — to help create a more just and sustainable future.
-
The Unsung Hero of Aisle 5: A Tale of Forgotten Change and Compassion at the SupermarketThis supermarket manager went above and beyond to help when a child forgot her change at the checkout counter. You might be surprised at some of the complications that supermarkets face when it comes to customers' forgotten change.
-
Train, Integrate, Retain: A Strategic Playbook for Adviser OnboardingsBuild a thriving practice by training new advisers with clear goals, structured processes and consistent mentorship for strong team growth.
