Don't Let The Fed Bully You

With interest rates remaining at all time lows, the Fed is essentially daring you to take more risk with your money. But don't let the Fed bully you into making stupid decisions.

Frustration. Right now, you're probably frustrated earning less than 0.25% in your money market fund and watching the value of the dollar decline. But there aren't many safe investment opportunities available to generate income. Short term U.S. Treasury bonds and FDIC insured CDs pay about 1 percent, and even 10-year rates barely break 3 percent. With the return on safe assets being so paltry, it's tempting to move money out of conservative holdings and into riskier opportunities in search of more return.

• Over the last 6 months, the riskiest assets seem to be going up while the safe one's aren't going anywhere.

Pushing You Around. By keeping rates low and flooding the markets with cash, the Fed is trying to push you into taking more risk. And in many ways, it's working. Money is cascading into junk bonds, foreign currencies, commodities and emerging market economies.

But this is a big experiment, and there's no proof that just flooding markets with money will create real economic growth. So those who are loading up on more risk because they can't stand the pain of being conservative may be in for a rude awakening if the global economy doesn't recover as quickly as anticipated.

Smoke and Mirrors. As an investor, you can't tell how much of the rise in any of these asset classes is real or simply the result of excess and inflationary cash pouring into these investments. A good chunk of those returns could be the result of a lot of smoke and mirrors.

• This is similar to the housing crisis. With ultra-low interest rates, the Fed, in combination with government policies that encouraged home ownership, inadvertently created a massive housing bubble. There was lots of money available to borrow and that excess money drove the price of housing well above the economic fundamentals. Those rising prices were the result of a financial bubble and not real economic growth, which is why they ultimately collapsed.

The same thing may be happening today in other asset classes. Large investors are borrowing huge amounts of money at almost 0 percent (thanks to the Fed), and then using that money to buy riskier assets. So there's a pretty good chance that some of that price increase is caused simply by more money flowing into those asset classes, and not real growth.

The point is you can't tell today because the global economy is so distorted by aggressive monetary and fiscal policies. As an investor, that means it's more critical than ever to maintain your discipline and not be bullied into taking more risk.

If you've decided you want a certain percentage of your money is safe assets, then I suggest you keep it there. It's fine to take risk, but you don't want to simply take risk because you're frustrated with the returns on your safe money.

Bottom line. Don't be bullied into changing your fundamental investment strategy. The story of the economic recovery is still being written and it's not clear how it will end.

As with all financial matters, consult your individual advisor prior to making any decisions.

Learn More: Want to learn about a simple way to manage your personal finances and prepare for retirement, investigate my upcoming book Your Money Ratios: 8 Simple Tools For Financial Security, available for pre-order at amazon.com

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