“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” — F.A. Hayek
The Fed and Congress, when weighing U.S. monetary policy, would do well to consider the lessons provided by structured investment management, which avoids forecasting and the wisdom of experts in favor of simple rules based on information readily available in market prices.
As years pass evidence steadily mounts that forecasting the stock market or individual stock prices is folly. Few, if any, money managers can consistently outperform the market on a risk adjusted basis, except perhaps by chance. So, rather than rely on the wisdom of stock pickers or professional market analysts, we stick to established asset class allocations regardless of what transpires in capital markets or within the broader economy. This approach is based on the notion that millions of market participants, rather than any pundit or team of experts, provide the best estimate of value for publicly traded securities.
The success of this approach has become more evident in recent years. Numerous academic studies demonstrate the futility of trying to find skilled managers who have outperformed the market consistently. The investing public, furthermore, has increasingly embraced index-type investing over active management strategies.
Central bank policy would arguably be improved if the Fed’s Open Market Committee (FOMC) were to adopt a similar rules-based approach to managing the nation’s money supply. Currently, short-term interest rates are determined by the consensus opinion of the FOMC’s 12 members; these individuals supposedly possess the knowledge necessary to ensure stable prices and full employment. This mechanism has often failed to meet those objectives, while in the process spawning or contributing to several financial crises.
Also In This Issue
The Patience Principle
Global Anxiety, Hope And Portfolio Exposure
Revisiting Exchange Traded Funds And Products
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Recommended Investment Vehicles
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