David Dierking, The Motley Fool
3 min read
For the first time in several quarters, there’s genuine uncertainty around what the Federal Reserve is going to do at its upcoming July 28-29 meeting.
According to the latest dot plot report, about half of the Fed’s voting members favor a rate hike by year-end, while the other half don’t. New chair Kevin Warsh himself decided not to submit his own economic projection in June and has been vague about where and when he thinks rates will move next. The only real indication he’s given is that he has “no tolerance” for high inflation.
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The markets hate uncertainty, and this situation is loaded with it. So how should you position your portfolio heading into the July Fed meeting? The best solution might be the simplest one.
VOO helps avoid the temptation to bet on a specific outcome
A lot of people are going to be tempted to make trades or portfolio adjustments based on whether they think the Fed will hold rates steady or hike them.
I think the best solution is to avoid making any predictions at all.
At its core, the Vanguard S&P 500 ETF (NYSEMKT: VOO) is a long-term buy-and-hold investment. The definition of “long-term” is generally several years, if not decades. And “buy-and-hold” doesn’t mean holding until some short-term event happens that makes you want to trade.
“Buy-and-hold” means riding out the ups and downs, the good and the bad, and anything that might happen in between. A single Fed meeting is not something you should be adjusting your long-term asset allocation for. Investing in the Vanguard S&P 500 ETF allows you to invest in the vast majority of the U.S. equity market. That takes away the guesswork and keeps a long-term focus on your money.
Why VOO makes more sense than VTI in this situation
There’s an argument to be made that the S&P 500 could come out ahead of an all-cap fund like the Vanguard Total Stock Market ETF (NYSEMKT: VTI) regardless of the Fed meeting’s outcome.
A rate hike or hawkish hold could hit small caps harder. VTI invests in small caps, but VOO doesn’t, creating the opportunity for outperformance. A surprisingly dovish tone from Warsh could send megacap growth names higher, which VOO overweights relative to VTI. I’d be careful saying that VOO is in a win-win situation, but there’s a reasonable case for why it outperforms in either scenario.
