Retirement Accounts To Get Taper Boost
NEW YORK ( MainStreet) Rising interest rates should be seen as a boon to investors' retirement portfolios, experts said.
The Federal Reserve announced in December that it would start to purchase $10 billion less of bonds each month starting this January. The tapering of the Fed's quantitative easing program artificially suppressed interest rates.
The Fed has pledged to keep interest rates low to help the economy "make a soft landing and to date it appears to be working," said Clay Singleton, professor of finance at the Rollins College Crummer Graduate School of Business in Winter Park, Fla.
The Fed's tapering plans have had "little effect so far" and should not be a concern for 401(k) holders, the real estate market or consumer loans, he said.
Investors need to be patient and avoid making costly mistakes by overreacting to short term gains or losses or volatility in the stock or bond markets.
"The best advice is not to worry about short term movements and remember the markets favor long-term investors with the patience to weather squalls and take advantage of the upward trend from sustainable economic gains," Singleton said.
Predicting the outcome of how the Dow and broad market will function in the short term is similar to playing a football game with six teams instead of the standard two, he said.
"Imagine a football field with six teams competing," Singleton said. "Two teams face each other from end to end while the other teams play from side line to side line. Footballs fly in every direction and from the stands it is difficult to tell what is happening as it all looks like mass confusion. This is a picture of the markets with many influences ebbing and flowing."
The Fed will ramp up its tapering in March after decisions on the debt ceiling have been completed, said Kevin Mahn, president of Hennion & Walsh, a Parsippany, New Jersey investment firm. The Fed should complete its tapering program by the end of 2014.
The market will experience volatility during January to February due to "another strained round of debt ceiling talks," he said. Investors should bypass the "drama" and instead "see this unrest as an opportunity to take some profits and move money out of the market during the first quarter."
Volatility in the stock market will be advantageous to bond holders, Mahn said.
"Bonds are likely to hold firm for the balance of 2014 as new Fed Chairman Janet Yellen and her team follow a very measured and transparent tapering process," he said.
Even with volatility, equities have posted strong returns overall, said Kimberly Clouse, private client advocate for Covestor, a registered investment advisory in Boston and London.
Investors should stick with keeping equity investments in their retirement portfolios, because they are more likely to "maintain purchasing power over time as they are more resilient to inflation than bonds or fixed income," she said.