It looks like no other topic is getting more investor attention lately than what the Federal Reserve is going to do.
How quickly should the central bank reduce its monthly bond purchases? When should she start raising interest rates? What effect will this have on the economy in 2022? Soaring inflation has caused investors to obsess over these types of questions.
But long-term investors would benefit greatly from avoiding this distraction and instead focusing on building a well-diversified portfolio of high-quality companies. Here’s why.
The Federal Reserve Building. Image source: Getty Images.
The Fed will do what it does
When I first started learning about investing and the stock market in 2013, I remember the tantrum typing caused by the Fed’s announcement to slow down the pace of its bond purchases. The central bank had injected huge sums of money into the financial system to stimulate economic growth after the Great Recession, and it was preparing to end this program. This scared off investors and pushed up US Treasury yields. And over the past eight years, I’ve noticed that the stock market is intensely obsessed with what the Federal Reserve says or does.
The behavior of the Fed is a macroeconomic issue, something that I think investors had better not pay much attention to. I say this because trying to predict this appointed President Jerome Powell and his team will do, it’s like going to a casino and playing roulette. It really is anyone’s guess what they will say or what course of action they plan to take.
After the last Fed meeting ended on Dec. 15, news broke that the pace of bond buying will slow down and the projection is for three interest rate hikes in 2022. Although that adds up without any doubt the clarity of the outlook for next year, i am confident that the Fed’s plans will change. They are the greatest economic minds in the country, and if they are unsure of what monetary policy will look like, how can investors get any idea?
The Fed will do what it does; this keeps the stock market on the edge of its seat.
Focus on the long term
I spend as little time as possible paying attention to macroeconomic issues. Of course, knowing what is going on in the economy at a high level is probably a good idea and provides more context. But if you are a long-term investor, all of your efforts should be focused on one thing and one: owning a well-diversified portfolio of high-quality stocks.
Some of the businesses I own, like Lululemon Athletica, Netflix, and Starbucks, have shown that they are winning no matter what the Fed plans to do at any given time. All three companies are selling products or services that are very popular with consumers, and that will not change in 2022.
Because I have invested in these stocks, I should only care about the likelihood of their continued success in the years to come, not what the central bank is doing. This mentality also prevents me from trading frequently and trying to synchronize the market, a hindrance to outsized returns.
What helps me sleep well at night is knowing that these companies have a proven track record, competitive advantages and strong growth prospects. They will surely be able to handle whatever the Federal Reserve decides to do. Plus, keeping an eye on the next five years (and beyond) means that most financial news is actually just noise to my wallet.
Do yourself a huge favor: ignore the Fed. Your wallet and your peace of mind will benefit immensely.
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Neil patel owns Lululemon Athletica, Netflix, and Starbucks. The Motley Fool owns and recommends Lululemon Athletica, Netflix, and Starbucks. The Motley Fool recommends the following options: $ 115 short calls in January 2022 on Starbucks. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.