The September meeting at the Federal Reserve was eagerly anticipated by analysts, economists, savers, and short-term traders because there was the real possibility that central bankers would finally boost the fed funds rate for the first time in almost 10 years. (For a good explanation of what the fed funds rate actually is and why it's important, click
here
).
In case you missed it, the Fed chose not to raise rates in September, but left open the possibility we might see an October or December increase.
Why wait? We can argue that the current economic environment is reasonably stable, and a fed funds rate stuck at zero is no longer needed to keep the economy going. In addition, we are approaching an election year, and the Fed doesn't want to be seen as influencing the election through interest rate manipulation (i.e. Bush v. Clinton). An increase in 2015 might be seen as less "political" than beginning that cycle in the 2016 election year. Finally, a hike in interest rates might finally bring some hope to fixed income investors dependent on their interest income.
At the press conference that followed the Fed's decision, Fed Chief Janet Yellen said the economy "has been performing well and impressing us by the pace at which it is creating jobs..." Still, that wasn't enough for the Fed to pull the trigger.
Instead, worries about what's happening in China and emerging markets were the primary reason the Fed chose to stay on hold - in particular, the effect a weakening China and emerging markets will have on the US economy. As Yellen noted at her quarterly press conference, "We focused particularly on China and emerging markets."
Post meeting, more than one Fed official acknowledged the decision was a close call (Reuters), and in a speech a week after the meeting, Yellen said she expects that a hike this year in the fed funds rate is "likely" followed by "gradual" increases. Note however Fed officials have been saying that since March - and here we are with only two months left in the year! (NY Times).
While I believe it is important to monitor various economic indicators and events that have the potential to impact various asset classes, it's also important to filter out "the noise" that only the shortest-term traders might find of value.
Perspective
In other words, let's put the last Fed meeting into perspective. Will it really matter one year, or five years, or 10 years from now that the Fed chose to raise or not raise interest rates at the September 2015 meeting? It won't.
It's the long-term that really matters, not the day-to-day or month-to-month gyrations in the market.
While rollercoaster rides can be fun for some (think teenagers, news commentators and day traders), I prefer the smoother ride of a longer term perspective.
As the influential economist Paul Samuelson once said, "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." It's why I tell clients it's generally best to skip the financial news channels that focus on the ever-changing crisis of the moment.
Market Performance September 2015
|
|
MTD* %
|
YTD %
|
3-year** %
|
Dow Jones Industrial Average
|
-1.47
|
-8.63
|
+6.62
|
NASDAQ Composite
|
-3.67
|
-2.45
|
+14.03
|
S&P 500 Index
|
-2.64
|
-6.74
|
+10.05
|
Russell 2000 Index
|
-5.07
|
-8.63
|
+9.54
|
MSCI World ex-USA***
|
-5.29
|
-8.69
|
+1.90
|
MSCI Emerging Markets***
|
-3.26
|
-17.18
|
-7.56
|
Source: Wall Street Journal, MSCI.com *August 31, 2015 - September 30, 2015
**Annualized ***USD
Bottom line
A pro golfer in the early 20
th century summed up the game by saying, "The way to win is by making fewer bad shots."
Diversification is a major step in the direction of making fewer bad shots, and it is the key to long-term success in investing.
In the late 1990s, many folks thought they were diversified simply because they owned 10 to 15 tech and dot-com stocks. In reality, they were chasing inflated returns and saw their stocks bludgeoned post-2000 (anyone remember Juniper Networks?
These days, biotech has been the hot industry, though recent developments have forced a significant pullback in this sector.
While there may be reasons to over- or underweight various industry groups and sectors, I typically recommend a core portfolio that gives you a stake in all the major sectors of the U.S. economy, as well as a modest share of the global economy.
Inserting bonds, income-producing securities, and some cash into the mix can further reduce risk.
Of course, it's easy to adhere to an investment plan when times are good. But some investors find it difficult when the road gets a bit rocky.
However, it's during times like these that financial detours and short-cuts can tempt you. In most cases, however, you'll wind up in an unfamiliar neighborhood, and the delay may cost you precious time. Which is why I continue to preach the old-fashioned diversification story.
If you ever have any questions about what I've conveyed in this month's message or want to discuss anything else, please feel free to reach out to me.