Money Talks: The signs tell a story

Well, it’s almost here. The annual sign that season is near and our friends from the north will soon be arriving…the arrival of the car carriers is an annual rite of passage. By the time October arrives, this particular sign will be everywhere.

The world of money management and investing is no different. Now, this is not to say that all of the signs available to investors are an absolute in their ability to predict a period certain event. However, many of the signs are right before us if we simply take the time to acknowledge them. One of the biggest and perhaps most overlooked and misunderstood signs are the pending rate increases by The Fed. Yes, by now it has been talked about so much that many retired investors have simply become “numb” to the idea. With the economy in  such a precarious position with no clear evidence either way as to the overall health of the economy, The Fed has been forced into a “wait and see” mode with regards to inflation.

It has been so long since investors have had to worry about inflationary pressure that many have just moved on with their financial lives as if it doesn’t exist, and rightfully so as we have not seen any meaningful upward movement with interest rates in over a decade. The bigger picture here is that although there are signs that the Fed will soon be forced to initiate rate increases, the consequences are all but lost on the average retired investor. As aware as many may be with regards to the catastrophic events that have muted the annual return for the markets over the last fifteen years, many have lost focus on the importance of The Fed’s actions and their effect on the future performance of the stock markets, or lack thereof.

Recently, The Fed released yet another sign that rate increases may indeed be nearing. The “magic” number for inflation to initiate rate hikes is a rate of around 2% annually. This is where The Fed goes into defensive mode in an effort to thwart the effects that inflation can have on both the economy and the stock markets. For the record, history has taught us that rising interest rates puts downward pressure on the stock market in the form of increased costs of conducting business which translates into lower earnings which in turn translates into lower stock prices…again.

Yes, the signs are everywhere if we simply take the time to comprehend their potential effect on our investments. Anyone who can fog a mirror should know by now that the Dow Jones average has hovered in a sideways direction for now roughly eighteen months. This type of sign is often referred to as a “congestion area”. This refers is to the ability of the market averages to reach a certain resistance level, such as the Dow reaching 18,000 and then selling off only to reach what is known as support levels, where buyers can bring the Dow back up into the range. Although generally a short term trend, this is now starting to show some age.

Often, signs go completely unnoticed. Many have not yet seen the signs pointing to proven, more effective alternatives to simply waiting on stocks to save the day. (See 3.3% annual return over last fifteen years.) Research has proven that the road to investing success is a far smoother ride when there is true and meaningful diversification, rather than simply owning various classes of the same old stocks.

The signs show a clear and documented advantage to owning alternatives such as managed futures and insured index strategies to complement any stock portfolio. The end results confirm the necessary components for investing success. The ability for futures too offer as much as four times more return than the stock markets with roughly four times less risk combined with the predictability of the insured index strategy to capture market gains while avoiding market losses certainly allows for the life of a SWAN, Sleep Well At Night.

William F. Hague is a managing partner of Hague Wealth Management; 239-389-1999 or WFHague@earthlink.net.