How you can protect your portfolio.
The stunning election results from earlier this morning will have short- and long-term reverberations, many of which are unknowable at this point. But beyond questions of health care policy and immigration, Supreme Court nominations and gun control, as an investor you may have one immediate reaction: What the heck is going on with the markets, and are my retirement account investments safe?
Those are understandable questions in the immediate aftermath of a Donald Trump victory few saw coming. Among the immediate developments following the election was the steep drop in Dow Industrial average futures, and an alarming stock market opening this morning. Let’s take a look at what’s happening and what it might mean for you.
First, take a deep breath
No matter how volatile the market remains this week and over the weeks and months to come, this isn’t necessarily a reaction to longer-term economic fears brought on by the idea of a President Trump. The first thing to keep in mind is that Wall Street dislikes uncertainty more than it does any Presidential candidate. And this election result stunned many observers, pollsters, and pundits. A significant part of the immediate market reaction was due to the blindsiding. This doesn’t mean a recession is coming, and it doesn’t mean a huge sell-off will continue unabated. In fact, experienced investors are likely to buy low whenever they can, which may mean a relatively quick market turnaround.
Now, take a closer look
Once your deep breath is finished, realize that this should be a time for high vigilance for you as an investor. The simple fact is that the President-elect does not have any military or government experience. And while he may be well-versed in the real estate market and tax loopholes, the world will be watching to see if he knows anything at all about monetary policy. This means global uncertainty, which is not necessarily a recipe for financial stability.
What can you do to protect your investments?
The answer to this difficult question is actually the same this morning as it was on November 7, and the same as it will be on Friday, January 20 (inauguration day): diversify your portfolio. How? By using a wide variety of diversification strategies.
If you work with an advisor, talk to him or her about your current investment portfolio, and whether it’s truly diversified. Make sure you are diversified by not just the type of stocks and bonds you’re invested in, but also by geography; by type of investment (a mix of equity investments and debt investments); by industry, and even by companies within an industry.
A truly diverse portfolio doesn’t have to have all these types of diversification, but it should include a few of them. Why? Because some investments, over time, have shown that they typically move opposite of each other, no matter the direction of the economic cycle. So if one portion of your investments is susceptible to a downturn in the market, another might perform better.
It’s way too soon after the election to take any definitive action related to your investments. Any knee-jerk reaction is likely to do more harm to your portfolio than good. Take a deep breath, take it slow, but make sure your investments are ready for the uncertain times ahead.