The Federal Reserve is set to raise interest rates this week. Included in the most recently released minutes of meeting of this group was a new phrase to add to your investment management vocabulary.
Quantitive Tightening.
You do not have to understand the Fed balance sheet operations to manage your 401(k). And you do not need to understand Quantitive tightening. But you must understand the effects of these Fed announcements on your 401(k) mutual funds.
The Federal Reserve pumped trillions of dollars of cash into the U.S. banking system. These efforts are a well-known monetary policy called quantitative easing, or QE.
The next move of the Federal Reserve is to put monetary policy in reserve. They intend to reduce their balance sheet down to size. The main reason for these efforts is to fight the strongest inflation in 40 years.
What may these moves mean to your 401(k) account value?
The Fed’s current balance sheet is at record levels. Fed officials have admitted in recent interviews. They have no idea of the outcome of their balance sheet reduction efforts. Or how the stock and bond markets will react.
Federal Reserve balance sheet reduction has never attempted on this historic scare.
The Fed is no longer going to be the largest buyer of government bonds. What happens to the price of any good or service when demand goes away?
In theory, the Fed wants to keep interest rates low to fight inflation. In process all 401(k) investors will have to find out the results of their efforts.
In the meantime, stocks are falling. Interest rates are rising. The bond and target date mutual funds on your default 401(k) menu are under siege.
Many mutual funds I watch for my 401(k) investment advice clients are down over 10% year-to-date. And we are only three months into the new year! Thank heavens my clients do not own any of those default 401(k) mutual funds.
Now is not the time to “set-and-forget” your 401(k) mutual funds. You have had over 12 years of successful “buy-and-hold” investment management strategies.
“All good things must come to an end.” Google says that Chaucer coined that proverb all the way back in 1374. It was first used in the U.S. in 1680.
Whatever the origin or the timing. You know what I mean. And I mean to inform you that nothing lasts forever in the world of stocks and bonds. And that is the same world that your 401(k) account needs to navigate.
Do not be like everyone else who owns a 401(k).
Remember when you saw quarter after quarter of all-time high 401(k) account balances last year? Over. Done. Cherish those memories.
Take the steps now to preserve your 401(k) principal. Sell the worst mutual fund or funds you own. Place the proceeds in the safety of the money market. Let the current social and economic headlines work themselves out.
Do not express regret in a few months when you did not take the time now to watch your 401(k) now. Massive things are happening to both stocks and bonds. Your 401(k) needs both your time and attention now.
Ric Lager
Lager & Company, Inc.
