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College of Business Alumni

Maximizing Portfolio Performance: Let the Fed Be Your Guide
Book Synopsis
Gerald R. Jensen, Ph.D., CFA, Robert R. Johnson, Ph.D., CFA, CAIA, Luis Garcia-Feijoo, Ph.D., CFA, CIPM

In recent years the scrutiny of Federal Reserve actions by the media and financial commentators has increased dramatically. Financial market participants hang on every word uttered by Federal Reserve Chairman Ben Bernanke for clues regarding future Fed actions. Furthermore, financial commentators now routinely attribute movements in security prices to Fed actions and announcements, which has created widespread recognition among investors that the Fed plays a crucial role in security market performance.

In spite of the intense interest in Fed actions, there is confusion as to what different Fed policies entail for security markets. What are the implications for security markets of a "tight" versus a "loose" money policy? A recent Financial Times story purports that the stock market performs better when the Fed pursues a tight money policy. This claim is directly contradictory to the strong and consistent evidence we have compiled from our scholarly research over the past twenty years. Furthermore, our research differentiates stocks by characteristic and offers insights regarding the type of stock that performs best during alternative Fed policy environments.

A recent phenomenon in the security markets has been the spectacular growth in investor interest in alternative assets, chiefly commodities. Many pundits advocate that investors should commit funds to commodities due to concerns about higher future inflation. Again, these inflationary concerns are generally linked to Fed policy, and in particular, its adherence to an "easy" money policy. Our research, however, indicates that commodities have been much more attractive investments during periods of "tight" money, not "easy" money.

Investor interest in investment decision making has increased dramatically in recent years, fed by two fundamental developments in the security markets. First, online trading has provided a much broader investor group with the ability to easily alter their portfolio composition. Second, defined-contribution pension plans have been replacing the traditional defined-benefit plans of old, thus, more individuals have become responsible for their own investment decisions. These developments have greatly expanded the group of individuals looking for practical guidance with their investment decisions.

In this book we demystify Fed policy and provide a rationale as to why market participants should care about the Fed and its actions. In addition, we provide a roadmap that individual investors and investment managers alike can follow to help them manage their portfolios more effectively, by taking into account Fed policy. In order to provide a comprehensive evaluation of potential investments, our analysis extends beyond US equity markets and includes foreign equities (of both emerging and developed markets), fixed income securities, real estate, and commodities.

This book serves as a go-to source to provide guidance for investors on navigating the investment landscape and avoiding common pitfalls. The book offers investors practical advice in an easy to understand terminology that can be applied by the casual investor or the investment professional. The presented investment guidance is based on widely publicized Fed policy actions and relies at its core on sound economic principles.

For more information contact: Dr. Gerald Jensen at gjensen@niu.edu.