New President, Old Principles
It’s the beginning of a new presidential term, and with new leadership comes new policies, conflict, and uncertainty in the marketplace. At least, that’s how many people feel. With the historic last few weeks America has had on top of a year that turned the world upside down, it’s no wonder emotions are higher than ever. Politics have a way of creeping into our investment decisions, and with increased anxiety comes increased risk to portfolios. Unfortunately, our emotions tend to guide us in the opposite direction of what is right.
Although the information super highway is literally at our fingertips, it doesn’t mean financial wisdom is easily within our reach. But there are tried and true principles and processes that long-term investors focus on that can help you navigate your financial decisions at any time—uncertain or otherwise.
Determine your risk level based on your timeline and tolerance for risk, not who is in the White House.
How much volatility can you accept? How long do you have before you need to use your money? What type of lifestyle do you live? What level of risk keeps you up at night? These are questions to ask yourself when figuring out your investments goals. Base your financial decisions on established financial principles, and base your political decisions on politics.
Never put money at risk that you need in the short-term.
If you expect to need money within 12 months, you shouldn’t invest in volatile or illiquid assets. Consider lower-risk investment options, or even not investing those resources at all. The average time between an up market’s peak and a down market’s lowest point is about three and a half years. Twelve months or less doesn’t give the market enough time to correct itself should the market not perform well, putting short-term investors at higher risk.
Diversify your portfolio.
The market will be quick to sort out winners and losers as political winds change. The areas you assume will win under the new administration may not pan out. For example, markets bet that Trump’s policies would be good for energy, financials, and that rates would go higher. However, four years later, rates dropped to record lows, and energy and financials were down big.
Remember that moving to cash has risk, especially during times of inflation.
When prices around the country rise, the buying power of a dollar decreases and your return potential is significantly lower in cash than it is in stocks. You may not see a drop in the balance on your statement, but your spending power declines. In times like these, we encourage our clients to stick to a long-term investment plan. Don't let the short-term volatility scare you. In the end, it’s the tortoise, not the hare, who is more likely to win the race. If you’re thinking of turning investments into cash, check with your financial planner. More times than not, we’ll advise against it.
Don’t fight the Fed.
Historically, monetary policy has held more weight than Congress or the president. The Fed is currently putting the “pedal to the metal” in an attempt to stimulate a post-COVID recovery.
Predicting a political outcome and predicting a market response are two different things. You might have predicted Biden would win the election, but who would have thought energy stocks would go up more than 40% the next month? Before you make any changes to your investment plan, check in with your financial advisor first. We’re not therapists by any means, but we can help you make unbiased decisions that are motivated by knowledge, expertise, and a deeper knowledge of the personal needs and goals of our clients.