I spend much of my days trying to coach clients and teach them how to understand the role that their portfolio plays in their lives. I try to teach them important lessons about money, economics and finance that go largely untaught in school and most of Wall Street doesn’t really want you to understand. For instance, I try to teach people that their portfolio is not really an “investment portfolio”, but rather a savings portfolio. I try to teach them that they should treat this savings portfolio more prudently than many people do (like, say, by piling 100% into stocks which exposes their savings to a rollercoaster ride). I try to teach people that they don’t need to outperform the S&P 500 and in fact shouldn’t even try. I try to teach people how different asset classes play differing roles in a savings portfolio but can be designed to complement one another in a way that helps you achieve the true goal that a saving portfolio should achieve – generating positive risk adjusted returns while protecting you from the risk of purchasing power loss and the risk of permanent loss.
I think there are lots of financial types out there who try to teach similarly prudent approaches. Not all, but many. So when I see the Fed explicitly trying to steer people into risky assets I get rather annoyed. They’re encouraging the exact type of mentality and actions that can be so dangerous and destabilizing.
This market focused approach to central banking gets so many things backwards in my opinion. Not only are secondary markets (like stock markets) mere reflections of their underlying assets, but the keen focus on these assets can have a highly destabilizing impact on the economy. People should not focus on how high they can bid up their stock portfolios. They should focus on maximizing their primary source of income and then utilize their savings portfolio in a manner that prudently protects what is nothing more than a residual from their biggest investment in life (the job that generates your primary source of income). The Fed doesn’t care about that so much. And neither do many economists who promote this idea that the Fed should be “Committing to being Irresponsible”.
In essence, the Fed is working against the prudent types. It’s working against those of us who are trying to teach people basic and important principles about money and markets that can help one substantially reduce risk in a savings portfolio and generate substantially greater stability and predictability with regards to one’s future.
The thing is, we’re all riding through life experiencing various bumps along the way. I wish Jeremy Siegel’s concept of “Stocks for the Long-Run” applied to most of us. But it doesn’t because none of us can actually afford to just sock away cash in stocks and let it ride for 50 years. A little thing called life happens along the way. You go to school. You have kids. You buy a house. You retire. You break your hip. These things don’t adhere to this “stock for the long-run” mentality. They require careful planning and prudence based on the understanding that your savings portfolio must actually BE THERE when life happens.
But the Fed wants you to jump in a Ferrari and race to the finish line at top speed. It doesn’t think you’ll crash the car because it thinks the car is “efficient”. But most of us shouldn’t be in a Ferrari. We shouldn’t jam our families in a little tiny Ferrari with no real safety features whipping around town at top speed. Most of us should be in a Honda Accord driving the speed limit with our kids buckled up securely and driving in a manner that gets us from point A to point B without incurring the unpredictable crashes that often occur when driving 100 MPH in a Ferrari.
But the Fed doesn’t want you to take the prudent approach. They want you to be irrational and imprudent. They want you to chase stock prices higher and allocate out of safe assets into the higher risk assets while incurring all the risks that come along with owning these assets. Personally, I think that’s a reckless message and has the potential to cause more instability over the course of the business cycle than stability. And that’s why many financial types like myself hate what the Fed is doing.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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