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Robert Johnson

Book Interview: Invest with the Fed: Maximizing Portfolio Performance by Following Federal Reserve Policy

Invest With The Fed

Getting To Know The Author: Robert Johnson

Isaac

Today I am pleased to say I am interviewing Robert Johnson, PhD, CFA, CAIA for his book Invest With The Fed: Maximizing Portfolio Performance by Following Federal Reserve Policy. How are you doing today Robert?

Robert Johnson

I am doing great, Isaac. It is a pleasure to be chatting with you.

Isaac

Now your book is here to help the everyday investor perform better by interpreting the Federal Reserve’s actions correct? What motivated you to write this book?

Robert Johnson

The motivation came from the fact that in the late 1980s I was a private wealth manager as well as a college professor at Creighton University in Omaha, Nebraska, and found that Federal Reserve monetary policy had a significant influence on the stock market. As a career academic, I have empirically studied the relationship for the past 25 years and have written many academic articles on the subject. I decided to work with two of my good friends, Gerald Jensen of Creighton University and Luis Garcia-Feijoo of Florida Atlantic University — also both CFA charterholders — on summarizing the findings of many years of research and putting it into the form that an astute individual investor could understand and benefit from reading.

Getting To Know More About The Book

Isaac

You have quite the impressive background, as a professor and a CFA title holder, which is a highly respected designation in the financial world. You mentioned that the book is aimed at the individual investor, how much knowledge should they have prior if they’d like to pick up your book and really get into it?

Robert Johnson

Thanks, Isaac. Prior to joining The American College of Financial Services as President and CEO, I actually oversaw the entire CFA Program at CFA Institute in Charlottesville, VA.
As far as the degree of knowledge that is needed to understand the book, one only really needs a cursory understanding of investments to benefit from reading the book. In other words, if you don’t understand the difference between a stock or a bond, the book likely won’t be of much benefit. But, if you have a basic understanding of the investment landscape, the book can offer insights that can help you manage your investments and help you profit from monitoring Federal Reserve actions.

Isaac

Perfect, it’s always good that the average investor can utilize the knowledge of the book especially in today’s extraordinary economic climate. With so much experience and research done on the Federal Reserve, what is your opinion on their recent policies? Did you think Quantitative Easing was the right move, and do you expect them to keep raising the interest rates as they have forecasted?

Robert Johnson

I think that the Fed did a masterful job helping the economy recovery from the financial crisis of 2008. It is difficult to imagine that we could have recovered faster than what has taken place in the last eight years. I find it extremely puzzling that some presidential candidates — on both sides of the aisle — have criticized the Fed and called for more oversight. I believe that as the economic recovery progresses, the Fed will continue to slowly raise rates. The economic numbers released this morning provide the Fed with more confirming evidence that economic recovery is indeed taking place. I believe that the Fed will likely raise rates from between 75 to 100 basis points this year — that is 0.75% to 1%. Even after that occurs, rates will still be at the very low end of the spectrum historically.

Isaac

Today’s data was positive, better than expected in fact. You mentioned that as evidence for the economic recovery – what is your view on the economy today, both domestically and internationally? We have had numerous shocks to the system lately with the price of oil crashing and China’s slowdown.

Robert Johnson

I think that the US economy is definitely moving in the right direction. Much like Warren Buffett — and this is likely the only thing I have in common with The Oracle of Omaha — I am very bullish on American companies. I am betting that American entrepreneurs and corporate America will perform well over the long-term. This is certainly not a message that our politicians are conveying. Of course, they have an ulterior motive. They need to convince the electorate that things are bad and that if you vote for them, they will fix what ails the economy. As for the global markets there are always, it seems, headwinds somewhere — whether it be Greece, China or Brazil — there is always a crisis de jour. I would also be willing to bet on China long term and I believe that the European Union economies, over the long haul, will show substantial growth. The problem is that most people focus on the very short term instead of the long term. Successful investing is a marathon not a sprint.

Additionally, doom and gloom sells. To get noticed in a crowded 24/7 media market, some people have adopted the strategy of saying something outrageous and they get attention. Just before we started chatting, the headline on Yahoo!Finance was “Jim Rogers: There’s a 100% probability of a U.S. recession within a year.” A more measured remark would not receive that kind of attention. Many pundits are as football coach Gene Stallings said about himself “seldom right, never in doubt.”

Isaac

Thats an excellent analogy Robert, unfortunately I’m expecting more of this rhetoric to be thrown around this election year. Back to your research on the book, throughout the 25 years did any specific data surprise your or jump out at you in particular? Something that you feel the individual investor wouldn’t have known and would have greatly benefitted from if he/she did?

Robert Johnson

The biggest takeaway is that it is the direction of interest rates and not the level of interest rates that is associated with stock market returns. When rates are falling, stocks tend to perform well. When rates are rising, stocks tend to perform poorly. And, the level of interest rates — whether they are high or low — does not play a major role. Take the current situation. Rates are unprecedentedly low by historical standards. Yet, our research shows that as the Fed raises rates, stocks advance much less than if rates were falling. And, the findings were very consistent. While there were periods that ran contrary to the relationship, the S&P 500, on average returned 15.2% when rates were falling and only 5.9% when rates were rising.

Isaac

Winding down the interview, in regards to casual investors who may have a large portfolio of bonds, and many do, especially retirees etc, what would you say is the golden rule when it comes to rate changes? A rule that you believe is indispensable to these bond holders?

Robert Johnson

When interest rates go up, bond prices go down. It truly is as simple as that. If one holds a large portfolio of bonds, I would counsel that person to shorten the duration — time to maturity — of those bonds. As rates rise, bond prices fall, but the prices of short term bonds fall much less than the prices of long term bonds. It is much better to own 5 year bonds when rates rise than to own 30 year bonds. I would also suggest that if your time horizon is long, say in excess of 10 or 15 years, you would be wise to have a larger portion of your wealth in stocks than in bonds. Since 1926, the average annual returns on a diversified portfolio of stocks is in excess of 10 percent compounded annually. Over that same time periods, government and corporate bonds returned a little more than 6 percent compounded annually. Over long time periods, a four percent annual difference in returns has substantial implications for long term wealth accumulation. My experience is that actually too many investors are overly cautious rather than taking too much risk. This is especially true of the Millennial generation who are financially the most cautious generation we have ever seen. They experienced the financial crisis through their parents eyes and it has profoundly influenced their risk tolerance.

Isaac

Great all around advice Robert. Well i’m sure our readers will love to pick up your book, especially those who invest as well as those who are curious about the Fed with all the renewed political debate surrounding it. I’ve greatly enjoyed the interview and your insights, thanks for doing it!

Robert Johnson

I appreciate your time and interest. Thanks, Isaac.

 

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