The Fed is Going Against The Basic Advice of Every Financial Advisor

The Federal Reserve is years in to and trillions of dollars vested in it's rehabilitation of the economy known as Quantitative Easing. To be sure, the Fed has the best interests of the economy and the wealth of the nation in mind. Unfortunately the tool it has decided to use and reuse is it's unforeseen effects, most notably the "yield grab".

The common mantra of every financial advisor to each of their clients is "diversification, diversification,  and diversification". Just the other day a well-respected and experienced money manager with a large fund was asked his opinion on the stock market and it's recent stellar performance. His take was maintain the long term view and stay diversified. By taking this approach the common investor can avoid the stress and the resulting mistakes short term and medium term traders make.

There is only one problem with this venerable advice: the Fed won't let you do it. Diversify, that is. The Fed doesn't make it illegal to diversify, that wouldn't work. No, through their actions the Fed has orchestrated one of the most massive "squeezes" ever seen. By printing money (QE) and purchasing mortgage backed securities and treasuries and therefore reducing the yield curve, everything from FDIC insured savings accounts to junk bonds (corporate) offer very little in return to investors. As a result, investors pursuit of yield has forced them to allocate monies that would normally be invested more cautiously in to more risky equity assets.

Unfortunately, and perhaps the cruelest twist to this effect are the investors that are most affected. Investors that are nearing retirement or are already retired and would normally allocate more and more towards less risky fixed income investments are left without many options. At a time in their lives that financial advisors would be suggesting they get more exposure to insured bond funds and reduce exposure to equities these investors cannot afford to as there  just isn't any yield. The result is less diversification and more reliance on equities. As long as equity markets are rising this doesn't present a problem. Unfortunately, equity markets don't move in one direction. They also go down and sometimes they go down a lot. This can be very uncomfortable for an investor living on the return of those investments.

Fixed income and their yields are not the only asset class suffering. Recently most commodities are also being affected. As the Feds policies pump up the equity markets unfortunately those policies have not had the desired effect on the economy as a whole. As a result, as the economy has not responded well to the Feds money printing, commodity values are reflecting such and are falling leaving another losing asset class that investors cannot rely on. It may be that equities can "save the day" and suffice as the lone asset class that investors need to rely on. However, this does not change the fact that the Feds actions are responsible for forcing investors away from responsible investing habits and creating the potential for catastrophic results should some black swan event rear its head.