Did The Fed Kill The Long Term Investor?

by Lance Roberts of STA Wealth Management,

Gone are the days where people looked towards next year when building their portfolios, or five years down the road as they approach retirement. Now from a combination of apprehensiveness and shear paranoia in our unstable markets, investors are looking only as far as they can throw for their personal investment decisions.

In more than 30 years of money management, I've never seen such a rapid change in the way people make financial plans. Instead of saving for the future, many are opting for fast gains — yet at the same time they want low risk. Others are playing it completely safe. In fact, in a quarterly poll my firm took, 83% of respondents said they were holding on to their cash versus investing in the stock market.

Why are investors so hesitant to invest when markets are at record highs?

It should come as no surprise that the 2008 financial crisis is still a major factor. As the banks were crumbling, the housing market caved and unemployment rocketed, investors' confidence sunk.

But in the years that followed, we saw a huge amount of government intervention in the form of various stimulus packages. While some may argue that this stimulus, including the Federal Reserve's quantitative easing, saved our economy, this injection of billions of dollars each month to buy government bonds has created a dangerous façade of market strength.

This is because although we get a visible boost from QE, these upward swings are merely a temporary high. The public has taken note of the Fed's parlor trick. An overwhelming 93% of participants in our survey wanted to end QE and let the markets readjust without government support. And we have every reason to worry. By the Fed thinking they can own an entire Treasury market, it is funding a new asset bubble that is at risk of bursting.

What should the Fed be doing to create jobs and economic recovery?

The Fed's recent decision not to slow its bond purchasing surprised everyone. This move, or lack thereof, only underscores the Fed's uncertainty about the U.S. economic recovery, making already uneasy investors think twice about throwing their hat — or their money — into the ring. And the fact that in a post-financial crisis world, investors are viewing the U.S. economic climate with a skeptical eye makes it all the more important for financial advisers to adapt to a different economic environment while also managing client psyche.

We've had to accommodate these new lines of thinking by reinventing our investment philosophy. Many of the risk management tools are no longer as useful. For example, in the past we could use the market's long-term moving averages to determine support and resistance levels. When these levels were broken it was historically indicative of a change in market trend. However, the impact of monetary interventions has rendered many of these longer-term tools ineffective.

The same applies to fundamental and inter-market analysis. Correlation between asset classes is high and stocks with low share-floats and poor fundamentals outperform fundamentally sound investments. While we still make fundamentally sound investment decisions, our analysis has had to change to be more accommodative to the increased price volatility of the markets.

The core fundamentals have changed because of central bank intervention, high-frequency trading and artificially suppressed interest rates. This is coupled with a large, and growing, amount of distrust with Washington. Our STA Wealth Management poll found that 46% of respondents felt that partisan politics were stalling U.S. economic growth.

The public is tired of not seeing solid movement to help our economy recovery in the wake of 2008. In the past five years, all we have been able to sustain is a stagnant unemployment rate and an influx of stimulus packages that are holding our economy together by the bootstraps instead of enabling it to grow on its own.

While we try to find that path to recovery among failed policies, investors are going to continue to gauge their risks and develop a new type of strategy to adapt to an extremely unclear future.

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