This time, the Fed may wait even longer before changing policy, he predicts.
“Our estimation is that they will be more lagging than normal. We think by the time they start to reverse course people will think, ‘What took them so long?’ We don’t think we’re in that environment right now,” Bernstein says.
Bernstein gave another reason for his belief that the Fed will not taper anytime soon: They don’t want to see all the work they did to prop up the economy fall apart in a matter of weeks.
“They spent the past three or four years trying to support the economy,” he says. “I don’t think they’re the smartest guys in the world, but I don’t think they’re that stupid.”
The stimulus by the Fed and other Western nations’ central banks has made it difficult for investors to find decent values amid the low interest rate environment.
Michael Mendelson, portfolio manager of risk parity strategies at AQR Funds, who also spoke on the panel, agrees it’s a tough time to invest. But he says investors need to focus on what they can do since they can’t control government policy or interest rates.
He says investors should create a portfolio with exposure to as many different types of returns as possible, including alternative investments such as liquidity premiums, reinsurance and real estate. “Go wherever you can find assets that are not as correlated,” he says.
The key, Mendelson says, is to build a better risk-adjusted return portfolio.
Diversification remains important, but there is some misunderstanding on this topic, Bernstein says.
“Diversification is a risk-reduction tool. If you get a higher return, that’s the icing on the cake, but that’s not the purpose,” he says.