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
About the Author
Charles Lewis Sizemore, CFA is the founder and editor of The Sizemore Investment Letter, a monthly newsletter dedicated to finding superior investments backed by powerful macro trends. He also serves as the Chief Investment Officer of Sizemore Capital Management LLC, a registered investment advisor.
Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine, The Wall Street Journal and The Washington Post, is a contributor to Forbes Moneybuilder.
He is also the co-author, along with Douglas C. Robinson, of Boom or Bust: Understanding and Profiting from a Changing Consumer Economy (iUniverse, 2008).
Sizemore holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom.
Prior to founding The Sizemore Investment Letter, Mr. Sizemore worked alongside best-selling financial author and economic strategist Harry S. Dent, Jr. in creating original research on the effects of changing global demographics on asset returns and economic growth and was a regular contributor to the HS Dent Forecast monthly newsletter and the HS Dent Blog—one of the most widely read financial blogs in the world.
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