These are words that no investor wants to hear a Fed Chairman say: “an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases…”
Ouch. Those words triggered the worst two-day selloff in months, as investors worried that the quantitative-easing that has helped to fuel the rally in risky assets as about to come screeching to a halt.
So what’s the risk here? Are the good times over for the foreseeable future?
A little perspective is needed here. Yes, we all know the third most important rule of investing (after Warren Buffett’s first two rules of “Don’t lose money” and “Don’t forget rule number one”). “Don’t fight the Fed.”
And to this I would add “don’t fight the European Central Bank, the Bank of Japan, or any other major central bank.”
Does this mean we should sell out of risky assets? No, or at least not based on central bank action. The Fed is “considering” tapering its QE3 bond-buying program. But you cannot make a case that the Fed is getting hawkish, and neither is any other central bank in the world at the moment. Rates remain fixed at zero and the Fed’s overall monetary policy is still nearly the loosest in its history.
Some of the hot money may leave the market, and a 7-10% correction wouldn’t be surprising given how far and fast the market has risen in recent months. So, this may be a good time to do a little portfolio rebalancing or pruning. But it’s certainly not a time for a major portfolio strategy shift.
I continue to recommend a long allocation to dividend-paying stocks such as those in the Vanguard Dividend Appreciation ETF (NYSE:VIG) and to master limited partnerships (NYSE:AMJ) and real estate investment trusts (NYSE:VNQ).
The Fed will tighten policy again…someday. But it’s not today and probably not this year.
Sizemore Capital is long VIG, AMJ and VNQ
