How to Play the Fed's New "Tapering" Policy

Long-term investors are mostly concerned with asset allocation, while short-term investors pay attention to companies that are likely to beat earnings expectations. So where should Fed policy fit in to your strategy?

This article published with permission from InvestmentU.com.

It’s amazing just how often — and how effectively — the media and its various talking heads get investors to take their eye off the ball. (In case you don’t play golf or baseball, taking your eye off the ball causes anything from a shank to a whiff.)

Right now, for instance, the topic du jour is “When will the Fed begin ‘tapering’ its bond-buying program and how should I play it?”

It’s a big, fat softball of a question for stock market “analysts” who like to show off how much they know while simultaneously revealing that they don’t have a clue what successful investing is really about.

Hot air

On one side you have the serious “experts” who insist the economy is too weak and the recovery too fragile for the Fed to pull the plug on its quantitative easing program (QE3). They use this as a rationale for staying invested in equities (and often bonds, too).

On the other side you have experts with equally furrowed brows who believe the recovery is gaining traction and so the Fed will begin tapering sooner than expected. This is why, they say, the stock market will soon sell off.

But let’s consider both sides for a moment.

Does anyone really know what the Fed is going to do and when? Of course not. So this isn’t analysis. It’s guessing.

And do you really want to risk your hard-earned capital on some talking head’s hunch about the unknowable?

My guess is no.

Yet, I know investors and traders who spend countless hours listening to this drivel on CNBC and its sister stations.

The odd thing is they invested equal time a few months ago pondering the myriad investment implications of the “fiscal cliff,” something that turned out to be a complete nonevent. However, it was a big success for the media outlets that love to hype buzzwords — “fiscal cliff,” “the sequester,” “Y2K,” etc. — to alarm and attract viewers, and satisfy advertisers.

Slicing the pie

In short, if you’re devoting your limited time on this little blue ball to Bravo Sierra like this, you’re patronizing businesses that are playing you for a fool.

So what should serious investors be focused on instead? If you are a long-term investor — and you should be if you aren’t eyeing the actuarial tables and spending down your nest egg — you should be most concerned about your asset allocation. This is how you divide your portfolio between various asset classes like stocks, bonds, real estate investment trusts, TIPS, etc.

Your asset allocation is the primary determinant of your long-term investment returns and is your single most important investment decision.

If you are a short-term trader, you should be seeking public companies with good (and protectable) margins, growing market share and rising earnings that are likely to beat consensus expectations in the months ahead. (Beating expectations — whatever they happen to be — is the primary driver of short-term share price appreciation.)

How about Fed policy… where does it fit in? That’s just it, it doesn’t.

Listen to the greatest investor of all time: Warren Buffett. More than two decades ago he told the world, “If Fed Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn’t change one thing I do.”

So turn off CNBC. If you haven’t noticed, it’s summer outside.

Alexander Green is the chief investment strategist at InvestmentU.com. See more articles by Alexander here.

The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.