As we wrote in our end-of-the year newsletter, in the equity markets we “Are Going Nowhere, But Getting There Fast.” We have had very favorable markets over the course of the last 4-5 years. At least part of this can be attributed to the unprecedented monetary stimulus by the Federal Reserve Board.
A prominent and respected portfolio manager, Bill Gross, recently said in his Investment Outlook “central banks are casinos. They print money as if they were manufacturing endless numbers of chips that they’ll never have to redeem. Actually a casino is an apt description for today’s global monetary policy.”
Last week, as expected, the Fed raised interest rates for the first time in 9 years. After having their foot HEAVILY on the accelerator during this time, they appear to be slowly changing directions. Bill Gross went on to say “the faster and faster central bankers press the monetary button, the greater and greater the relative risk of owning financial assets. I would gradually de-risk portfolios as we move into 2016.”
We agree with his assessment. We look to place more emphasis on the return of your money than a significant return on your money. While there are many ways to reduce risk, here are five to consider:
- Reduce equity exposure
- Reduce risk in the equity allocation you continue to own – some techniques are large-cap stocks vs. small-cap, reduce emerging or international markets, etc.
- Reduce credit risk in the bonds/fixed income you own – we already have begun to see signs of stress in the fixed income markets – we are VERY wary of any positions below Investment Grade
- Reduce Interest-Rate Risk – pay close attention to the maturities of bonds and fixed income in your portfolios – reduce the length of maturity to reduce interest rate risk
- Maintain greater than normal Cash positions – while rates are still ridiculously low, remember we are focusing on a return of your money in 2016
If you have a trusted financial advisor, we recommend reaching out to them either before the end of the year, or the beginning of the new year. It’s time to reassess where you are in your own financial journey in context with the new direction of interest rates. If you don’t have a trusted financial advisor, we recommend a professional with the Garrett Planning Network.
Happy New Year!