During recent months, world wide stock markets have declined from their high points, mostly due to trade tariff rhetoric and related actions.
This has mostly affected large US and International company stocks, as well as emerging markets. US small company stocks have performed better, as they are perceived to not be as affected by trade war discussions.
How do the trade tariff threats and potential actions impact our recommended stock market strategy?
The discussions between countries, as well as pronouncements and reactions by various leaders, causes greater uncertainty for the financial markets. It is hard to know which products, companies or industries, both domestically and Internationally, will be affected in the short or long term.
As we have discussed many times before, uncertainty is inherent in investing, particularly with stock investments.
We would not recommend taking specific actions in reaction to the trade tariff developments. We would not recommend changing your portfolio’s asset allocation due to these talks and threats.
It is too difficult to determine who the winners and losers will be. It is uncertain how the rhetoric will eventually play out and which companies or sectors will benefit or be hurt, either in the US or elsewhere.
To make short term moves in response to trade war concerns is really a form of market timing, trying to make guesses or predictions about something that cannot be accurately forecasted in advance.
Last week I participated in a webinar with Dimensional Fund Advisor’s Co-Chief Executive Officer and Chief Executive Officer, Gerard O’Reilly. In response to a question about the level of stocks and these trade tariff issues, he succinctly stated that “market timing is not a good way to manage risk.”
O’Reilly then explained that a better way to manage risk is through a well-thought out asset allocation plan. We completely agree with this advice.
Rather than trying to react to current events and news with concern or constantly wanting to change your portfolio, it is much better in the long run to set a stock to fixed income balance that you are comfortable with (your personal asset allocation plan), regardless of what the financial markets may do.
We work with clients to develop this type of asset allocation plan, which is dependent on your personal situation. Your asset allocation is determined based on your financial needs, such as how much you need your assets to grow over time to match your financial and life goals. It is also based on your ability to handle risk and market volatility.
In essence, by focusing on setting your asset allocation, we are focusing on factors we can control. We cannot control or predict what markets or world leaders will do in the future. To base your financial strategy on trying to predict what may occur is not an investment philosophy we recommend.
While we share your concerns about the trade talks and the potential for near term market volatility, it is important to remember that volatility can be up and down, not just down. Markets can react to news very quickly, either positively or negatively.
While we do not know what will happen in the short term, we are confident that the financial markets will be rewarding over the long term. We are not going to risk missing out on the long term financial rewards of stocks by temporarily moving out of certain asset asset classes or sectors in the short-term, as that entails potentially missing out on sudden, quick positive moves in those same asset classes or sectors.
Having a consistent investment philosophy like this has been rewarding and comforting for our clients during the 15 years we have been financial advisors.
And we continue to believe this is the most optimal and rational investment strategy.