If you tune into financial news at all, or watch the news at all, or read headlines, or are aware of current events in any fashion…you’re bound to see a blurb about the Federal Reserve meeting and interest rate decision. Well get a pen, because I’m about to tell you the things you need to do immediately with your portfolio now that the Fed has spoken.
That’s right, nothing. Unless you are a leveraged interest rate or currency trader with billions in your care…you do nothing. This is the first of many times you’ll hear me say this. This news does not matter to you.
The Federal Reserve has historically had two jobs: to aim for full employment while controlling inflation, what you’ll hear in the financial news called a ‘dual mandate.’
Their main tool to do this is setting the interest rate that banks charge each other on overnight loans, officially called the Federal Funds Rate. When the Fed changes this rate, it creates a trickle-down effect throughout the economy, generally causing other interest rates to rise in response. For an investor, the result will generally be that you earn more interest on your money, but it will also cost you more in interest to borrow.
But if you’re an amateur investor with some mutual funds, or even an investor using a professional advisor, you’ll see the news and be tempted to think you have to act. Why? Because the media and the financial outlets (CNBC, Fox Business, Bloomberg, etc) have to fill air and they have to sell ads. They do this by making everything seem like an actionable item, of course to the detriment of long-term investors. We call it ‘infotainment.’ It’s information, packaged with fireworks and bold headlines and screaming heads on your screen to make it all seem very urgent.
This won’t be the last time I’ll touch on this subject, but the media is not your ally in investing. You should be intelligent and informed, but not reactionary. If you have a balanced portfolio designed around your long-term goals, the Fed decision is simply another headline in the daily news cycle, but no more impactful than the weather.