Insights from Aaron Izenstark, co-founder and CIO of Iron Financial
How will the Federal Reserve’s decision to taper its stimulus program impact the market? Aaron Izenstark, the co-founder and Chief Investment Officer of Iron Financial, spoke with Spectrem’s Millionaire Corner. This is the first part of that conversation.
“While the purchase of the bonds was an unprecedented issue in modern-day finance,” he said, the tapering is also an unprecedented takeaway. There are a lot of unknowns it will bring to the marketplace, as well as a lot of supply that will not be purchased anymore by the Fed. This creates some obvious risks and issues that could happen this year or into next year.”
The Fed announced earlier this year that it would continue to gradually taper its economic stimulus, also known as quantitative easing, the strategy designed to pump more money into the economy and keep interest rates low to encourage people to invest in businesses and buy homes. The Fed has been buying bonds since September 2012. The central bank said it would reduce its monthly bond purchases by $10 billion, down to $55 billion a month.
One of the risks of the Fed backing away from the bond market, Izenstark said, would be “a gradual rise of interest rates, at least on the longer end, 5-10 years and longer. On the short end, the Fed said it will keep rates low, but we could expect a gradual rise in interest rates given a huge buyer will not be stopping by.” Half of Millionaire investors surveyed by Spectrem’s Millionaire Corner are concerned about an increase in interest rates, up from 47 percent in 2013.
Izenstock also spoke about diversification and liquid alternative investments in a bond portfolio. Diversification is considered by Millionaire investors surveyed by Millionaire Corner second only to risk as a criteria in selecting an investment. Typically in a portfolio, Isenstark said, you (primarily) have part stocks and part bonds. If you’re going to put something else in there, the whole point of modern portfolio theory is to diversify to smooth out the overall returns in your portfolio and have less volatility in your assets.”
In considering an alternative investment, Izenstark recommended it should be a non-correlative investment to stocks and/or bonds. “If you’re just putting something else in there that correlates with the bond market, you’re not getting that liquid alternative to a bond portfolio,” he said. “Because we live in a global market, there are plenty of mutual funds out there you can invest in that does this type of investment whose goal is to be non-correlative.”
Donald Liebenson writes news and features for Millionaire Corner. He has been published in the Chicago Tribune, The Chicago Sun-Times, The Los Angeles Times, Fiscal Times, Entertainment Weekly, Huffington Post, and other outlets. He has also served as a marketing writer for Chicago-based Questar Entertainment and distributor Baker & Taylor.
A graduate of the University of Southern California, he is married with a college-age son. He also writes extensively about entertainment.