Apr 18, 2017

What Does The Fed Mean For Your Portfolio? Not as Much as You Might Think.

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Since at least 2010, people have been predicting higher interest rates. Now, finally, the Federal Reserve (the Fed) has been steadily raising its benchmark interest rate. But contrary to what you might expect, this does not necessarily mean that we are in a bear market for all interest rates. In fact, there have been several periods when the Fed consistently raised its benchmark rate and long-term interest rates actually fell.

For example:

From 2004 to 2006 the Fed raised its benchmark interest rate from 1% to 5% while over the same period, long-term bond yields actually declined.

From 1994 – 1995 the Fed raised its benchmark interest rate from 4.75% to 6%, meanwhile 10-year bond yields declined from 7.75% to 6.25%.

And conversely, in 1991 – 1993 the Fed cut rates from 7% to 3%, during which long-term rates remained elevated and at some points even increased.

This is worth noting because many investors mistakenly structure their portfolios based on what they hear people saying about interest rates or what the Fed might be doing.

For instance, in the aftermath of the great financial crisis many pundits were claiming that with the economy recovering, interest rates were sure to go higher. What actually happened was that the 10-year treasury bond rates fell from 3.75% to 2.5%. Thus, investors who took this advice and positioned their portfolios with the expectation of rising interest rates in 2010 would have missed out on at least 7 years of higher current yield, not to mention price appreciation.

The take-away is that interest rates are more than just the Federal Reserve. Though the Fed does play an important role, the bond market is large, complex and difficult to predict. As such, an intelligent portfolio allocation, and not the intuition of pundits, is the investor’s best hope for maximizing wealth.

WhiteTree is an independent, fee-only advisor. To find out more Get In Touch.

Disclaimer: This information should not be used as a general guide to investing or as a source of any specific investment recommendations, and makes no implied or expressed recommendations concerning the manner in which an account should or would be handled, as appropriate investment strategies depend upon specific investment guidelines and objectives. WhiteTree is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. This is not an offer to sell or a solicitation to invest. This communication does not constitute a recommendation to buy, sell, or hold any investment securities.

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Sep 29, 2016

Risk Parity – WhiteTree’s All Seasons

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Every investor faces the challenge of asset allocation. The piece below describes, in layman’s terms, the thought process behind a framework for addressing that challenge. This framework was developed and refined by some of the world’s most sophisticated and successful investors. It is, in my professional opinion,  the investor’s greatest hope for successfully navigating the […]

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Apr 4, 2016

Almost Does(n’t) Count: Ackman Valeant – Buffett Salomon

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  “Risk is more things can happen than will happen”  – Elroy Dimson “Many things can happen but only one will” – Howard Marks   Sometimes a thing creates an echo in your mind. That is to say you keep thinking about it, and while you know it’s important, you can’t quite externalize why. An […]

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Feb 18, 2016

Handicapping Atlantis – South Florida’s Sea of Troubles

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The article below is an excerpt from WhiteTree’s Q4 market commentary. If you would would like to receive our quarterly commentary, please email us at info@whitetree.net. “What important truth do very few people agree with you on.” – Peter Thiel Michael Lewis’ The Big Short is out in theaters. The movie is a lightly fictionalized account […]

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Feb 8, 2016

Allocating Blame

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“All things are full of weariness; a man cannot utter it; the eye is not satisfied with seeing, nor the ear filled with hearing. What has been is what will be, and what has been done is what will be done, and there is nothing new under the sun… In much wisdom there is much […]

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Jan 27, 2016

Don’t Get Hornswoggled by Leveraged ETF’s

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The article below is an excerpt from WhiteTree’s Q4 market commentary. If you would would like to receive our quarterly commentary, please email us at info@whitetree.net.

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Jan 19, 2016

Scott Adams on Priorities

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From How to Fail at Almost Everything and Still Win Big: It’s useful to think of your priorities in terms of concentric circles, like an archery target. In the center is your highest priority: you. If you ruin yourself, you want be able to work on any other priorities. So taking care of your own […]

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Dec 23, 2015

How Did The Fed Raise Rates?

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If you want to do something fun and kind of mean this holiday season, find your local financial know-it-all, and ask them to explain how the Federal Reserve raised interest rates this year. In all likelihood you will see a distant look come across their face, perhaps a slight flush in the cheeks followed with […]

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Dec 7, 2015

The Way Back Machine – Peter Lynch, Carl Ichan & T. Boone Pickens – Videos

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Though not literally from The Way Back Machine, these videos of Peter Lynch (1994) and Carl Icahn with T. Boone Pickens are a trip down memory lane. A confession seems in order, I’ve never read a Peter Lynch book but this video makes me want to pick one up.   Carl Ichan and T. Boone […]

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Sep 30, 2015

Links

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Here is a thought provoking article from Gavyn Davies over at the FT. The Fed faces a difficult situation. They want to normalize rates but if they do and are wrong, they may face an even more unpleasant set of choices. (Link) And from Matt Levine at Bloomberg, a great line about Carl Icahn and Donald Trump: […]

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