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Last week Federal Reserve Chairwoman Janet Yellen said the Fed would no longer be “patient” regarding raising interest rates. Except then she said, “Just because we removed the word patient from the statement doesn’t mean we are going to be impatient.”
What? Huh?
The markets have responded by gyrating. So has the dollar. Nobody quite knows what to make of this gibberish, and all the pundits have entered their own theories on exactly when the Fed may raise rates. Or not.
How can you, as an investor, navigate this Fed insanity? There’s a very simple answer.
Ignore it.
That’s right, ignore all the talk about the Fed raising rates, when it might happen, how high they may go, and how the market will digest it. Unless you are day trading, rather than investing, it is going to make little difference in your overall strategy – provided you are invested in a long-term diversified portfolio across many asset classes.
Nobody has expressed this more succinctly than the legendary investor Peter Lynch, who said, “Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.”
Some investors may argue that the companies they are invested in are affected by increases in interest rates. Fine. Then you should already know how interest rate changes will affect that company, and already have a plan in place about how to respond.
For example, if you are invested in business development companies (BDCs) or mortgage REITs (mREITs), then interest rates may significantly affect those investments. You better know exactly how, though. If you don’t, you shouldn’t be invested in them.
In my soon-to-launch low-cost subscription newsletter, The Liberty Portfolio, I will be selecting investments that are intended to be held for the long term, and are not dependent on interest rates. That’s because I like to invest in companies based on their business plan, how they execute it, their financial statements and balance sheets, and understanding how their customers think.
Is there any investment where interest rates are going to matter enough that you should keep an eye on the Fed? Yes. These are yield-dependent investments.
Let’s take something like preferred stocks, which I love. A preferred stock is a perfect cross between a company’s stock and its bonds. Stock gives you company ownership. Bonds allow you to be a lender to the company.
Preferred stock is right in the middle. It gives you quasi-ownership, but no voting rights. It trades more like a bond, in a tight range without much volatility. It pays interest at higher rates than bonds because it carries slightly more risk.
Most preferred stocks pay dividends in the 5% to 9% range. If interest rates rise, then Treasury bonds begin to pay higher yields. As those yields climb, they begin to compete with preferred stock. If rates rise high enough, people will sell their preferred stock for the lower-risk Treasury bonds. The same goes for other types of bonds, like municipal bonds or higher-yield corporate bonds.
That, however, is a long way off. The 10-year Treasury is only paying 1.875%.
So rest easy, and stay the course with your long-term diversified portfolio. Forget about the Fed.
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