Foolish Four Portfolio
By
Me and My FOMC
WOODSTOCK, NY (Oct. 5, 1999) -- If you've paid any attention to the financial media lately -- or if you haven't but live and breathe near a newspaper, television, or radio -- you probably know that the Federal Open Market Committee (FOMC) met today to decide whether to raise, cut, or maintain interest rates. (See the press release here.)
Stock market media zealots await the gospel according to FOMC as if the decision were somehow going to revolutionize the American economy. Millions of people were on a Fed watch, waiting for the 2:13 p.m. announcement like it was New Year's Eve at Times Square. Alan Greenspan, meet Dick Clark.
For Foolish Four investors, the Fed's decision is totally irrelevant. Unless the FOMC meeting happens to occur on the day a portfolio is rebalanced, we could do our thing without even being aware of the Fed's existence. The Foolish Four method works because, over the long-term, it has chugged along no matter which way interest rates went.
Still, as investors, it behooves us to learn exactly what makes the FOMC so powerful. Not only will it benefit our overall investing knowledge, it will also enable us to make friends and impress associates as we babble off Fed trivia at cocktail parties.
The FOMC is made up of the seven members of the Federal Reserve Board and five Federal Reserve Bank presidents, who serve on the Committee on a rotating basis. According to the Federal Reserve website, the FOMC meets eight times per year to "set Federal Reserve guidelines regarding the purchase and sale of government securities in the open market as a means of influencing the volume of bank credit and money in the economy."
The meetings traditionally feature summaries of international economic developments, reports on conditions in the domestic financial markets and the banking system, and a presentation on the U.S. economy as a whole, which is accompanied by a staff-prepared forecast of the future. Even with this diligent preparation and research, it's essential to remember that no one, not even the FOMC, can predict the future. While the Fed definitely tries to anticipate the future in order to benefit the U.S. economy, unexpected events here or abroad can render any forecast meaningless.
Policy options are then laid out and a long discussion follows, at the end of which a vote is taken that decides what the Fed will do, if anything.
For an individual investor, market mania over the Fed's actions is confusing. If the Fed raises rates and triggers a stock market selloff, we wonder why the government is taking actions to squeeze the lovely profits out of our investing accounts. Truth is, however, that the Fed is our friend and only has our best interests at heart.
The Federal Reserve is the central bank of the United States, and was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. In consumer-speak, their ultimate goal is to keep the economy at a comfortable rate of growth and inflation under control.
More from the Federal Reserve website: "The Federal Reserve's overall duties fall into four general areas: 1) conducting the nation's monetary policy; 2) supervising and regulating banking institutions and protecting the credit rights of consumers; 3) maintaining the stability of the financial system; and 4) providing certain financial services to the U.S. government, the public, financial institutions, and foreign official institutions."
Please read our special feature on the Federal Reserve to learn more about Alan Greenspan and his merry band of men and women. I also recommend visiting the Federal Reserve's website for helpful guidance about choosing credit cards, mortgages, and handling banking problems.
Today, as the pundits widely anticipated, the Fed elected not to raise interest rates and adopted a bias towards tightening rates in the near future. The market fell (wasn't not raising rates supposed to be good news?) and so did our stocks. Ho hum. It's only one day.
Over the long term, the Foolish Four goes forward, returning a long-term yearly average upwards of 20%. That's worth paying attention to!