There’s No Free Lunch

This week, Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen testified before Congress to discuss monetary and fiscal policies and provide their outlook.

What does that mean? Essentially, Congress wants to know how all the spending the government is doing will affect the economy…and how we’re going to pay for it all.

“Yellen and Powell basically said that we’ve made good strides in terms of our recovery from the pandemic, but we still have a long way to go and they’re willing to do whatever it takes to make sure we do,” says John Stewart, chief investment officer at Farmers Trust Co. “As far as inflation, a lot of people are concerned about those rising price pressures. Both Yellen and Powell think that it’s manageable. But if we do get into a situation where inflationary pressures get too hot, we can always just raise taxes.”

In the latest Investors Edge, Stewart offers his thoughts on this. He also provides insight into one of the biggest pitfalls investors fall into.

Talking points in this episode:

Featured Insights: There’s No Free Lunch!

  • One of the biggest pitfalls investors fall into is selecting investments that have the highest yields.
  • Why buy a stock with a 3% dividend yield when there’s one paying 4%? Why buy a bond paying 2%, when you can find one that pays 3%?
  • It is important to remember that there is no free lunch – this is especially true in the financial markets. Higher yield = Higher risk.
  • It does you no good if the stock you buy pays you a 5% dividend and proceeds to fall 10% in price.

Looking Ahead: Quarter-End Rebalancing

  • With the first quarter of 2021 coming to a close next week, big institutional investors like mutual funds, pension funds, and 401k plan managers will be rebalancing their portfolios.
  • Expect additional volatility in markets as this rebalancing activity will likely create some larger than normal price moves across certain asset classes and sectors.
  • Keep in mind, when compared with the end of last year’s first quarter, stocks are significantly higher relative to what was then the economic shutdown-induced low point for equity markets. In addition, interest rates have moved substantial higher in recent months. Therefore, most rebalancing activity will likely involve selling stocks and buying bonds.

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