At PDS, we simplify things. Our objective is to make complex financial topics more approachable for our clients. No doubt the presidential election last fall made things seem more complex. Over the past few weeks, I have offered the first two rules of investing in a Trump World. The first rule told you to be diversified. No individual can sink the entire stock market; they can however create instability for a specific company, or a narrow segment of the market. Secondly, I recommend having ample capital reserves to help you weather any market correction that will eventually come.
Half of us feel great about the future, and half of us are scared to death. If you’re optimistic, I believe you need to stick to a tried and true investment strategy, and likely reign in your euphoria. If you’re on the edge of the cliff, I would also remind you that this market was not born and raised on Donald Trump’s watch, nor will it die on his watch. Remember what I have been saying all along – presidential tenures are measured in years, and portfolios are measured in decades. This brings us to Rule #3 – remain committed to a long-term strategy. If you have diversified your portfolio (#1) and have ample reserves to meet short-term obligations and surprises (#2), then you are positioned to take a longer view on markets and not be frightened into an emotional decision based on who is in the White House. How important is this rule? Consider a study done by Putnam Investments which shows the impact of missing the best 10, 20, 30 and 40 best days of the market over a period of time.
It’s easy to see that missing just the 10 best days over a 15 year period would have netted you roughly 50% less money in the end. Consider the 15 years that were covered from 2002–2016. There were plenty of both good and bad days in the market. Clients often think they can time some of these things. In fact, it’s harder than you might think. This same study by Putnam showed that those best days often occurred during the most unlikely times.
How many of you would have been able to exit the market during the Great Recession of 2008 but also find your way back into the market on the 7 dates listed in orange in the preceding graph?
Positioning this discussion back to Trump’s recent election, we can take a look at how the S&P 500 has performed since November 9th. In total, the index is up 11.24% (through March 16, 2017). Missing just the 5 best days would have cost you roughly 5.5%, or about 50% of the return over the past four months. These great days were spaced apart from one another with no predictable pattern. Sound like a familiar theme? Timing these moves is nearly impossible and if anyone suggests they can pull it off, I would run far and fast. Your best strategy is to maintain your long-term strategy.
Here is a quick recap for the rules of Investing in a Trump World:
- Be diversified
- Have ample capital reserves in stable asset classes
- Remain committed to your long-term strategy
It’s pretty simple – if you follow the first two rules, the 3rd becomes very easy. If you’re not sure your portfolio is designed to succeed, give us a call.
We’d love to help simplify your life.