Will the Fed Go Too Far? Ep. 99

Often people attempt to guess at what will cause the next market correction, and sometimes we are taken off guard. Things like September 11th happen or the Coronavirus. Nobody saw those events coming, and they caused a major downturn in the market. These are commonly referred to as “black swan” events.

This year is different. We’ve seen this recession coming. The government announced last year that the Fed would begin increasing interest rates and decreasing its balance sheet. The government bought bonds and equities and lowered rates during the pandemic to stabilize the economy. In hindsight, the government did too much of these things and it has caused inflation to reach 40-year highs. Something had to be done to decrease prices, so rate increases were prescribed by Fed policy makers.

We recently saw the biggest rate increase we’ve had in 20 years and some people are left wondering, will the Fed go too far in pushing rates up? It feels like this is a controlled burn and the government is facilitating a potential recession, which is unlike anything we’ve seen in the recent past. The issue is the government doesn’t have many choices about how to deal with surging inflation.

 So, how do we create retirement income plans when we know things will happen along the way that we can’t control? We preface any conversation with the fact that we know we will have down years in the market, but historically, the market has always gone up over time.

Next, we know in order to not be a speculator in the market, we have to have time in the market to allow for our values to increase and to be earned in the long-term. We set up two buckets.

One bucket is in the market and our goal is to advise our clients to not touch this bucket and allow it to appreciate. We seek a modest return, because if we are batting for the fences, we unnecessarily increase our risk.

Then we have a bucket of money that can only go up. It can’t decrease. We illustrate to grow less than it typically will and we draw income from this bucket that can’t lose value.

Once this bucket is depleted, we can replenish it with our other bucket that has grown. With our approach we are diversified, we have decreased risks, and our clients don’t have to wonder if they’ll have income money.

When is the right to take action on creating a retirement income plan? It’s like most things in life. When we have new knowledge and we can act it’s often appropriate to execute as soon as possible. This year it’s even more true because waiting may increase your risk of continual losses.

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