It seems like lately, no other topic receives more attention from investors than what the Federal Reserve is going to do.
How quickly should the central bank wind down its monthly bond purchases? When should it 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 by avoiding this distraction and instead focusing on building a well-diversified portfolio of high-quality businesses. Here's why.
The Federal Reserve Building. Image source: Getty Images.
The Fed will do what it does
When I first starting learning about investing and the stock market in 2013, I remember the taper tantrum caused by the Fed's announcement to slow down its pace of bond purchases. The central bank had injected massive amounts of money into the financial system to boost economic growth after the Great Recession, and it was getting ready to wind down that program. This spooked investors and sent U.S. Treasury yields soaring. And for the past eight years, I've noticed that the stock market has been intensely fixated on what the Federal Reserve says or does.
The Fed's behavior is a macroeconomic issue, something I think investors would be better off not paying much attention to. I say this because trying to predict what renominated Chairman Jerome Powell and his team will do is similar to going to a casino and playing roulette. It's really anybody's guess what they will say or what course of action they plan to take.
After the end of the Fed's latest meeting, on Dec. 15, news broke that the pace of bond-buying will decelerate and that the projection is for three interest rate hikes in 2022. While this no doubt adds clarity to the outlook for next year, I am positive that the Fed's plans will change. These are the top economic minds in the country, and if they don't know with any level of certainty what monetary policy will look like, how could investors have any idea?
The Fed will do what it does; that's keeping 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. Sure, knowing what is happening in the economy at a high level is probably a good idea and provides greater context. But if you're a long-term investor, all of your efforts should be on one thing and one thing only: owning a well-diversified portfolio of high-quality stocks.
Some of the companies that I own, like Lululemon Athletica, Netflix, and Starbucks, have shown that they are winners no matter what the Fed plans to do at any given time. All three businesses sell products or services that are wildly popular with consumers, and this won't change in 2022.
Because I have invested in these stocks, I should only care about the likelihood of their success continuing in the years ahead, not what the central bank does. This mentality also prevents me from trading frequently and trying to time the market, a hindrance to outsize returns.
What helps me sleep well at night is knowing that these businesses have proven track records, competitive advantages, and solid growth prospects. They will surely be able to handle whatever the Federal Reserve decides to do. Furthermore, keeping my eyes on the next five years (and beyond) means that most financial news is really just noise for my portfolio.
Do yourself a huge favor: Ignore the Fed. Your portfolio and peace of mind will benefit tremendously.
