A straightforward guide to navigating stock market volatility
By Charles Brighton
Political uncertainty remains a hot topic among investors, even with the contentious 2016 election over a year in the rearview mirror. It’s not just the unpredictability of U.S. markets, either. Spend any amount of time watching or reading financial news, and you’ll soon see how events in one country can easily impact the actions in another.
Setting aside the surprise election results for a moment, 2017 alone brought catastrophic hurricanes, mass retail closures, war threats, and pending tax changes to further stir the uncertainty pot.
The reality is, there’s always uncertainty, political or otherwise, in the investment space. It may take the form of a different catalyst each year, but you can—and should—always plan for market pullbacks. The three truths about political uncertainty and investment outlined below will help you understand how to protect your finances in spite of the tumult and get the most from your long-term savings strategy:
It doesn’t matter who was elected president in 2016—in the long run.
Before Donald Trump became the 45th president, there was talk from both ends of the political spectrum about which major candidate would be best for their investment portfolios. Once President Trump emerged the victor, concerns shifted to his campaign promises and the resulting financial outcome if those promises become reality.
Individual and corporate tax reform, deregulation, and infrastructure spending were among the biggest talking points of candidate Trump’s campaign. After the election, the stock market rallied about six percent in the first month of his presidency. Analysts believe the positivity in the stock market stemmed from overly zealous optimism regarding the proposed tax breaks and other campaign promises.
However, given President Trump’s receding popularity since his inauguration and the increasing congressional opposition to his agenda, some experts anticipate a correction coming.
The president can affect an economic decline, but only to a certain degree. After that, the irrevocable forces of the market are in control. At that point, it doesn’t matter who is sitting in the Oval Office. What matters is that you didn’t scare yourself out of a few years of potential growth.
Political fears are usually fleeting, but the brief uncertainty could be your best gain
Nathan Rothschild was a born-wealthy German who took an interest in finance and successfully pulled off one of the greatest investment schemes that was ever told. Just after the Battle of Waterloo in 1815, Rothschild sent a courier-led order to London to sell his stock, sending other investors into a false fury to unload their own.
Given Rothschild’s influence in the financial realm, the move falsely signaled that Napoleon had won the battle and their English dollars would soon become worthless. Government bond prices sank. London traders were selling incessantly. Amidst the panic, Rothschild scooped up a bounty of stocks at bottom-dollar prices, making nothing less than a small fortune and adding a large feather to his wealthy cap.
Stock market volatility exists regardless of whom you voted for or who holds power in Washington.
Ethically questionable? Absolutely. But in hindsight, there are a couple of lessons here that smart investors will do well to observe. As the sage George Santayana once said, “Those who cannot remember the past are condemned to repeat it.”
- Initial reactions to new data could devastate your portfolio. The investors who sold off all their stocks before confirming whether Napoleon won or lost the war would agree. Rothschild proved long-term investments can be fueled by short-term fears that create the best buying opportunities. With Rothschild’s bold move came a wariness of investors, thus likely preventing a repeat of a similar move in modern times. However, there will always be a handful of investors who succumb to political fears and put their growth potential on hold—don’t be one of them.
- Political fear doesn’t last. In Rothschild’s case, his money was made on others’ uncertainty. It probably didn’t matter who won the Battle of Waterloo, as Britain would have survived in some capacity (though the road to righting itself may have been a bit longer). Even the market fear after 9/11 was short lived.
It’s hard to predict exactly how disasters and elections will shake up the market. Your best defense against the unforeseeable is to look at what hasn’t changed rather than focus on temporary events.
Political uncertainty isn’t the biggest cause for investment concern
Understand that political risk isn’t the top cause for concern among most investors. Rather, losing money on a bad investment or the possibility of outliving your money tend to weigh heavier on investors’ minds. And for good reason, too—calculating longevity risk is all about making your money outlive you.
While interest rates are also a legitimate factor, remember that monetary decisions made by the Federal Reserve Board remain fairly independent from the charged political atmosphere in the White House or on Capitol Hill. While President Trump recently nominated Federal Reserve Governor Jerome Powell to replace current chair Janet Yellen when her term expires in January, Powell is expected to offer continuity by adopting Yellen’s overall policy framework. As it stands right now, forecasters predict a 2 percent inflation rate by 2018.
Truthfully, stock market volatility exists regardless of whom you voted for or who holds power in Washington. However, just like voting, it’s up to you to do your part in ensuring you’re participating in planning for your financial future.
Talk to one of our expert advisors today to safeguard your portfolio in the face of political uncertainty. Remember, every presidency is temporary, so don’t let any outcome put you at a permanent disadvantage.
Charles Brighton is the co-founder of Brighton Jones and managing director of the firm’s family office practice.
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