STEWARDSHIP 48 JUNE 2025 www.goodnewsfl.org Good News • South Florida Edition Some believe that our investment IQ goes up at the same pace as our favorite index. Humorous, but all too often true. That is until the index goes into freefall, and we quickly realize the risks we were taking, and, perhaps, just how softheaded towards markets we can sometimes be. Risk emerges when not knowing what we’re doing but thinking that we do. Fiat (paper) money is a miracle of the human political economy. A government takes a piece of paper, puts its seal on it, and declares it legal tender for all debts, public and private. It is used as a primary medium of exchange. But to do this over an extended period of time, the money creator has to convince us that its value will hold up. If the money creator loses credibility with its privileges, we simply demand more pieces of paper to compensate for the abuses. This is the essence of inflation. With the U.S. dollar, the more credible the Federal Reserve (“Fed”), the more money the government can print, pay its bills, and keep inflation in check. The Fed The Fed has a dual mandate of price stability and maximum employment. The U.S. Central Bank (federalreserve.gov) was created by the Federal Reserve Act of 1913 to establish a monetary system that could respond to stresses in the banking system. The Federal Reserve System includes a Board of Governors, and twelve Federal Reserve Banks located around the nation. It performs five key functions to promote the health and stability of the economy and the financial system: conducting the nation’s monetary policy, promoting financial system stability, supervising and regulating financial institutions, fostering payment and settlement system safety and efficiency, and promoting consumer protection and community development. But the Fed is best known for setting interest rates. Many of us don’t realize that the Fed only sets very short-term interest rates, with an intention that those will influence all other rates. Often, but not always, as debt markets have a final say. America’s deficit spending is massive, and our debts are mountainous. Current efforts to shrink the deficit and slowdown debt’s growth are much needed. However, sustained surpluses and declining debt are goals that likely requires a debt crisis to fully realize. If history has taught us anything, it’s that paying ever-rising interest payments on an ever-growing pile of debt is a recipe for disaster. Still, even while occasionally wobbling, U.S. Treasury debt is widely considered the safest investment in the world. Which brings us to three more core investment principles: Bet on America, Diversification and Interest Rates. Bet on America America is the world’s largest, most innovative, most accounting transparent and most law-centric economy in the world. We exchange our goods and services with the U.S. dollar. Many throughout history have bet against America, for endless reasons, including our current challenges, and they’ve been wrong. They’re likely to be wrong again. Diversification We have all been taught that exposure to other markets is a critical component of investment diversification. However, currency swings are frequently left out of the discussion. America’s largest companies generate nearly 45 percent of revenues outside of our borders. Companies such as Apple, ExxonMobil, Johnson & Johnson, Pfizer, Proctor & Gamble sell large quantities of products throughout the world. And they have highly experienced professional teams that work to protect their results from currency swings. When investing in these companies we get plenty of overseas diversification. Also, we should generally avoid outsized investment exposures. Interest rates When making an investment, we need to be able to reasonably calculate our expected return and compare it to the “safe rate” of U.S. Treasury debt. Moreover, our expected return needs to be commensurate with the risk we are taking. And we better be paying attention to the Fed and the direction of interest rates. All other things being equal, when interest rates are falling, assets prices are rising, while the opposite is equally true. History teaches us that the nature of investing is that the investor must bear the risks of their investments in order to realize a profit. We once heard it said that an investment loser prefers to believe that they have been robbed rather than they have been following fools. Having a well-developed investment IQ is a critical component of being able to bear that risk. Bet on America, consider diversification and follow interest rates. A final word. Exceptionally strong investment returns were realized by most in 2023 and 2024. But those returns pale in comparison to an investment in many of the ministries highlighted throughout the Good News. A return in The Creator’s economy is often incalculable. Don’t miss out on the most important investment of all. Look through these pages with an eye towards making an investment in even one of these exceptional ministries! Patrick J. Kelly has spent more than four decades at the most senior levels in the financial services industry. He has held executive leadership positions in banking and securities firms, served numerous profit and nonprofit boards, possesses advanced education in economics, accounting and finance, and has been a featured guest in numerous financial media forums. At present, he endeavors to impart his experience and knowledge to younger generations whenever possible while also offering consultation on securities and banking industry practices for litigation-related expert witness testimony. Grading Our Investment IQ - Patrick J. Kelly - President, Kelly Advisory Group
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