Why I’m not changing my portfolio after the election
Reprinted courtesy of MarketWatch.com
Published: Nov. 15, 2016
To read the original article click here
After last week’s presidential election, I heard from many investors who wondered if they should ditch their equities or stay put … or even invest more.
The collective wisdom was all over the map. On Monday and Tuesday, the market rallied robustly as Hillary Clinton’s chances seemed suddenly stronger.
But on Tuesday night and in the wee hours of Wednesday (when the U.S. markets were closed, thank goodness), it appeared that Clinton had lost. U.S. stock futures plummeted as big investors anticipated anxious times.
When the market opened on Wednesday morning, that previously feared election outcome had become certain. And suddenly it was welcomed by investors, as the market rallied. And rallied again Thursday. And again Friday.
Measured by the Dow Jones Industrial Index DJIA, 0.29%, the U.S. stock market gained 5.5% in this tumultuous election week. It was the biggest one-week gain in nearly five years.
You probably know all that. But what does it mean? Does this rally give you a clue about what you should do?
Like many other investors, I was interested in this at the end of last week. What I wanted to know was: What does history tell us?
Specifically, has the stock-market’s behavior during the week of a presidential election accurately predicted the direction of the market over the next four years?
As I discovered from a little digging, the answer is “not really.”
- During the presidential election week of 2012, the market fell 1.5%. But over the following four years, it ROSE by 39.8%.
- In the presidential election week of 2008, the market fell 3.6%. But over the subsequent four years, it AGAIN ROSE by 44.3%.
- In the presidential election week of 2004, the market rose 3.6%. But over the subsequent four years, it FELL by 7.5%.
- In the presidential election week of 2000, the market was down 2%. Over the next four years, the market FELL by 7.3%.
Bottom line: In three of the past four elections, the election-week trend was wrong as an indicator of the market’s direction in the next four years.
In some years, the election-week trend will accurately predict the next four years. But I think the correlation is pretty random.
The reason should be obvious to anybody who thinks about it: Between now and November 2020, the identity of the president will be only one of tens of thousands of facts, events, reactions and forecasts that will make the market go up and down.
Like any other investor, you can believe what you want and do what you want. You’ll take the consequences, and of course I hope your consequences will be favorable. I like my readers to be successful.
Here are the changes that my wife and I have made and the changes we plan as a result of last week’s election:
There, that’s it. Did you miss it? Does something seem missing?
If so, then you got the point, which is that we are doing nothing different. Zip. Nada. Nothing.
Here’s why:
Life is relatively easy for me as an investor (which is not the same as saying it’s always comfortable and comforting) because I know exactly what to buy and what to sell, and I know exactly when to do that buying and selling.
I follow a set of principles that take the guesswork out of the decision-making process. Without those principles, I wouldn’t know what to do.
I didn’t develop this expertise all by myself. I learned from the smartest minds in the academic community, people who have studied results from nearly 100 years of investing.
Here are five of the most important things I have learned from “the smart people” about how to invest in times of great uncertainty.
One: All the evidence suggests that the equity part of my portfolio should be built with so much diversification that lasting damage is very unlikely. This means U.S. and international funds, value funds and blend funds (which include growth stocks), large-cap funds and small-cap funds, real estate funds and emerging market funds.
Specifically, I recommend 10 equity asset classes in a winning combination that is easy to understand and easy to implement.
Two: As we learned last week, anything is possible. The smart people have convinced me that I’m not likely to make productive decisions, no matter how smart I am or how hard I work, by trying to analyze all the economic, political and social variables that drive the stock market.
In fact, I know that my reactions to those variables will be mostly driven by emotions. And when I make decisions based on how I’m feeling, those decisions are likely to turn out badly.
Three: The smart people have taught me to include short-term and intermediate-term bonds in my portfolio, because owning only equities carries a built-in risk of losing half my money in a normal market cycle.
They challenge me to figure out how much risk I’m willing to accept and still “stay in the game.”
My wife and I have concluded that we’re comfortable with owning a 50/50 mix of stock funds and bond funds. That will limit our likely losses to the range of 20% to 25%.
Four: Earlier I said that I know exactly when to buy and sell. That’s because the smart people have taught me to periodically rebalance my portfolio so it gets back to my risk tolerance. I do this once a year, whether or not I feel like it or think the timing is right.
This is uncomfortable, as it requires me to sell assets that have been performing well (for example stocks during a bull market) and buy assets that have been doing less well.
Doing this is especially uncomfortable when I must sell relatively safe assets like bond funds that have been doing well and put the money into less-safe stocks that have been doing less well.
But I know that this mechanical discipline undoubtedly works in the long run, and I do it.
Five: I mentioned owning international stocks. It’s always more comfortable to invest closer to home in “what you know.” But the smart people have taught me that going beyond my “home bias” with half of my equity portfolio will pay off in the long run. So far, it has done that for me.
International equities add diversification, opening up a world of opportunities. And they increase currency diversification, too. That’s not a bad thing at all when suddenly a new and unpredictable president is about to move into the White House.
So how do I deal with the drama of last week’s election? With my investments, I do nothing different. I just follow the rules I’ve been taught by the smart people. I don’t have to make guesses or predictions. I don’t have to try to figure out what other investors will do and then what I should do because of what they do.
Do you get my drift here?
With these five lessons firmly learned and implemented, I can now watch events unfold. I’m still very concerned for what may happen to our country and the world.
Still, I’m more comfortable knowing that I’ve done everything I can to protect my family’s financial future.
I hope you will do the same.
For more of my view of the upcoming years, check out my latest podcast, “What will the market do under President Trump and 12 more important questions.”
Richard Buck contributed to this article.
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