11:00 PM, Apr. 7, 2012
Article from Daily World
On March 26, Ben Bernanke, Federal Reserve chairman, reaffirmed the Fed's desire to continue to keep interest rates low for the foreseeable future.
Annual price inflation is currently about 3 percent and 90-day Treasury Bills yielding about 0.10 percent, it appears investors will continue to confront negative real returns on cash equivalent investments for some time.
The Fed has a dual mandate: maximum employment and price stability.
Based on recent actions, the Fed has clearly chosen to pursue maximum employment at the expense of investors who rely on cash and cash equivalent assets: Treasury Bills, CDs and money market accounts.
Sarah Raskin, who serves on the Fed's board of governors recently said in a speech that —» Instead, the bulk of household wealth is held in stocks, retirement accounts, business equity and real estate" and that "for these other types of assets, rates of return depend primarily on the strength of the economy and how fast the economy is growing.
Thus, these returns should be supported, over time, by the accommodative monetary policy that we have in place."
To put the quote in context, she said in the speech that less than seven percent of household assets were in short-term instruments.
To translate her quote, "Don't worry, buy stocks." It appears Ms. Raskin is not very concerned that stocks, business equity, and real estate are much riskier than cash equivalents.
It is true that these assets have provided rates of return that have outpaced inflation over time; however, they have done so with more volatility.
In essence, the Fed is trying to encourage (force) savers to speculate with their savings.
Economic research shows that 15 percent annual price inflation is not unlikely by 2014, depending on monetary velocity and future Fed policy.
Therefore, as bad as low interest rates are for savers, it could get worse.
Current Fed policies have left investors with a trade-off — accept negative real returns on cash equivalent securities or take a chance by increasing portfolio allocation toward stocks.
It is prudent to have domestic stocks, foreign stocks, real estate, and gold (riskier assets) in one's portfolio.
However, these more volatile asset classes should be offset with short-term bonds and other cash equivalents, which are intended to provide a hedge against short-term price inflation.
Investor's best defense against price inflation remains a portfolio allocated across various asset classes according to needs, risk tolerance, and investment horizon.
One should be careful to reach for yield by overweighting high yielding stocks or below-investment-grade bonds.
Craig C. Le Bouef, MBA, CPA/PFS, CFP, Shareholder of Going, Sebastien, Fisher, & Le Bouef, LLP, Certified Public Accountants, Registered Investment Advisors, and Consultants, 2811 South Union, Opelousas, LA. Website: www.goingcpa.com. E-mail: craig@goingcpa.com
Article from Daily World