While comedians, the media, and political analysts may welcome an endless and unpredictable source of new material, many main street investors and regular folks are nervous about the changes the new President may make over the next four years.
More to the point, they want to know how a Trump presidency will affect their portfolios, and what, if anything, they should do about it.
I am not a political analyst. I am not trying to sway anyone’s political views. And I am not defending or denouncing Donald Trump as the President. Elections have consequences and there will definitely be winners and losers over the next four years. Presidents wield enormous power and influence, but America also has a system of checks and balances. I trust that in the long run, our system works.
In the meantime, you and I still need to go to work, save for college and retirement, and plan for our future. My advice today is the same as it would be with any new President.
Avoid extremes. Selling everything and burying your money in a hole – even a figurative one — is a bad idea. Just as moving to cash in January of 2009 wasn’t a good move, neither is taking a 100% cash position now. That doesn’t mean you shouldn’t increase your cash position temporarily or make some adjustments to your portfolio, but be careful about “all or nothing” strategies. In my experience, they rarely work out in the long run.
Reassess your cash reserves. When investors are less confident, they naturally want to take less risk. If you fear the worst, adding to your short-term cash reserves makes sense. This isn’t a knee-jerk reaction to a new President, it’s just being careful.
For retirees (or those about to retire) this may mean having enough in safe, liquid investments like money market funds to cover your cash flow needs for a period of time, maybe three to five years. If you need $2,000 a month above your pension and social security income to pay your bills, setting aside $120,000 should get you through just about any market downturn. For more details on how this works, check out my previous post.
If your job or ability to earn an income is at risk, reducing debt or having some extra cash on hand could be wise. Just be sure to avoid making extreme financial decisions based on fears of what may (or may not) happen in the future.
Rebalance your portfolio. The so-called “Trump Bump” has pushed many stocks to new highs. The current bull market is the second longest in history. Some asset classes like large cap US stocks have been on a tear for years. Nearly every market forecaster predicts higher than normal market volatility over the next 12 months.
Think of it this way: You Delta pilot has just announced, “Passengers buckle your seatbelts. We’re expecting a bumpy ride.”
Taking some profits and rebalancing your portfolio while markets are high is rarely a bad idea. If you are worried about how a Trump presidency may affect your IRA balance, it’s OK to buckle up your seat belts and prepare yourself for a bumpy ride – just in case. However, resist the temptation to sell everything, to pile up on extreme investments or to abandon the plans and strategies you have spent years putting in place. You don’t need to strap on your oxygen mask just yet.
Make decisions based on your risk tolerance and time horizon. Markets will decline at some point. Expect market declines of 10% or more at least one or two times this year. You should also expect a market decline of 25% or more before this decade is over.
I can’t predict when these declines will happen or what will trigger them, but I can almost guarantee that they will happen from time to time. Market declines are a part of investing. According to JP Morgan Asset Management intra-year market declines of 10% or more are not unusual, having happened at least 19 times since 1980.
In fact, you’ve already experienced at least two of them in the past 12 months. Last year, markets were off more than 10% in January and again for a short time in July. No doubt you will experience market swoons like this again. Money that you will need to spend over the next three to five years should be managed carefully. If you are more conservative with your investments, your time horizon may be longer.
Try not to predict the future. To paraphrase Yogi Berra, try to avoid making predictions, especially about the future. Experts get paid to forecast and opine on what will happen in the future, but the truth is that no one really knows.
Few pundits predicted a Trump victory last November (personally, I think even The Donald was caught by surprise). Fewer still predicted the rise in stock prices markets have experienced since then.
Will taxes go down? Will corporations repatriate assets into the U.S.? Will infrastructure and defense spending rise? What will happen to the healthcare industry?
No one can say for sure. Guessing what will happen during a Trump presidency, what Congress will do next, and how markets will respond to these unknown events is tricky business.
Keep things in perspective. Things rarely turn out as badly as people fear. Like all presidential candidates Trump said a lot of outrageous things to get elected. He also made a lot of promises to his base. Granted, his comments and promises were extreme. But he will soon learn that change comes slow to Washington, and like most politicians he won’t be able to fulfill many of his campaign promises.
Presidents must work with Congress to get their agenda passed. Even though the Republicans enjoy a majority in both houses of Congress that doesn’t guarantee the new President will get everything he wants. And if members of Congress want to get reelected, it’s possible they may push back on Trump’s more extreme proposals.
Donald Trump will lead our country for the next four years. Understandably, a new President adds uncertainty to an already uncertain investing landscape — this President perhaps more so than others.
You may or may not like the new President, but until we get some clear facts we can act on, it’s best to avoid making any major changes to your investment plan.