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Will Clearer Fed Embolden Investors?

The Federal Reserve may begin stating its goals and plans in plain English, but advisers are warning clients: Just because you understand the Fed doesn’t mean you should act on it.

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The Fed is likely to spend much of their its Dec. 13 meeting debating ways to improve their communications and could overhaul the way they present their policy plans early next year, the Wall Street Journal reported this morning. The goal is to be more explicit about what inflation and unemployment levels they’re targeting and how they plan to get there. Though these details could move markets and interest rates and advisers warn investors shouldn’t try to pre-empt those moves. “It’s kind of a fool’s game,” says Jason Ware, a market strategist with Albion Financial Group in Salt Lake City.

Investors should not be making moves based off of a Fed announcement or target because there’s no guarantee the those targets will be reached or that markets will react in the way the Fed expects, says Nicholas LaVerghetta, a financial adviser in Ramsey, N.J.  For example, investors who pile into bonds on news that the Fed plans to keep rates low could get burned if rates come up sooner than the Fed expects or if the action they take is ineffective, says LaVerghetta, who recommends a more balanced approach. LaVerghetta is holding mostly short-term bonds to minimize the risk that he could lose money if rates come up and bond prices come down, but he is also holding some riskier high-yield bonds, which would do well and boost returns if interest rates stay low.  “We’re reading too much into every piece of news and I think people are getting whipsawed because of that,” says LaVerghetta. “You want to look at general trends.”

To be sure, some investing pros say clearer signals from the Fed might actually reduce market swings instead of promoting them. If investors know the Fed’s longer term goals, they can make longer-term decisions instead of reacting to new programs when they’re announced, says Mitchell Reiner, a financial adviser in Atlanta. The Fed’s announcements could also serve as a check point of sorts for investors to gauge whether their expectations align with the Fed, adds Reiner. “Or it could be a sign that we need to make a change,” says Reiner.

However, the pros warn that investors who try to capitalize on the Fed’s plans by buying investments that should benefit from the central bank action could get caught in a trap of making short-term moves. They could get burned if they get the timing wrong, experts say. “You end up getting into this game of trying to outsmart the Fed,” says Ware. “You end up investing more of yourself to stay on top of it.”

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