Fed's Lower Interest Rate 1/4 Percent;
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Santa, aka Federal Reserve Chairman Ben Bernanke, did come last Tuesday and brought a quarter point reduction in interest rates, however the market acted like the spoiled kid who saw just manure in the box and didn't bother looking for the pony. The market's response was to dive 294.26 points or 2.1% to 13432.77.
But it may be that the Fed knows what's best for us, because on Friday came the unexpectedly large jump in consumer prices which suggested that inflationary pressures are still out there. Consumer prices rose 0.8% last month from October, the largest monthly gain in two years. Core prices, which exclude food and energy, rose 0.3%, higher than forecast and the highest since January.
Energy prices, which climbed 5.7%, accounted for more than two-thirds of the November gain. That, along with food prices increasing due to demand from China and other developing countries, prompted former Fed Chairman Alan Greenspan to say "this is a much tougher monetary-policy environment than anything I experienced."
Since he stepped down last year, Mr. Greenspan has said that high productivity growth and low-cost labor from China and India during his tenure helped push down inflation, but that those forces are now reversing. Kenneth Beauchemin, U.S. economist with research firm Global Insight, said the sharp rise in consumer rise in consumer prices "may well be the first clear sign that months of soaring and volatile energy prices are seeping their way into consumer prices at large."
The market reacted to all this on Friday by dropping another 178.11 points on the Dow Jones Industrial Average. The blue chip average ended the week down 2.1%, its worst weekly performance since the week ended Nov. 9, however it is still up 7.0% this year. And with prices rising and the economy still growing. the Fed will have increased pressure to formulate a policy that will keep the economy in the right balance. The last thing Wall Street wants is an increase in interest rates which would raise borrowing costs for businesses and consumers.
Because of the increased volatility we have witnessed in recent past, it has become ever more important that you have the right asset allocation in your portfolio to manage your risk. " Active" asset allocation strategies involve adjusting the portfolio relatively frequently based on certain market events. However, even the most passive asset allocation strategies require portfolio readjustment at certain points, such as when you reach a certain age or are drawing close to within a few years of reaching your goal.
Managing your risk is the most difficult part of investing. Fear and greed are the natural emotions that make managing your risk difficult. Fear is the result of overestimating risk, while greed is the product of underestimating it. Overestimating and underestimating risk are both bad and result in the wrong investment decisions being made at the wrong times. This in turn impacts the way we allocate our assets, the quality of the investment selection and the discipline of re-balancing.
The volatility in the market we see lately is exacerbated by the electronic means at the disposal of the traders on Wall Street. With the punch of a button, millions of shares are bought and sold. When certain parameters are reached, programs are initiated that automatically make trades. Some of these sophisticated moves work and some don't.
You have to have your own individual plan that works for you. So remember to keep your risk within your tolerance and keep ahead of inflation.
I invite your questions.
Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
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Jerry Cole - Retirement, Investment |
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