The world is full of surprises. The way you respond to surprises is crucial to long-term investment success. Following Donald Trump's upset victory to become the next President of the United States, here are a few things to consider in the context of your investment portfolio.
The President Is Less Important To The Economy Than You Think
The world isn't that different than it was yesterday. Yes, we have a new president, but the future is equally unknowable. The forces that impact an economy act over long periods of time and there isn't much a president can do about it.
Donald Trump will be in office for either the next U.S. recession or the longest economic expansion in U.S. history. Either outcome will have very little to do with Mr. Trump's policies and views. Factors that play a bigger role include market valuations, corporate profits, business cycles, monetary policy, etc.
Stock Investing Is A Long-Term Bet On Capitalism
Investing in stocks is a bet on capitalism - that companies will continue to maximize shareholder profits regardless of the political landscape. As long as you believe the executives running companies will continue making efforts to earn as much profit as possible, regardless of government policies and regulations, then your long-term bet on stocks should pay off over time.
In order to be compensated for that long-term bet, stock investors must assume uncertainty in short to intermediate stock returns. We never know when the next downturn will happen, but a good investment strategy and financial plan should account for regular downturns for various, unpredictable reasons.
Focus On Things You Can Control
Although market futures initially were pricing in dramatically lower stock prices, actual trading has been relatively calm. This is a perfect example of markets at work. Millions of participants use available information and expectations of the future to drive asset prices to a very close estimate of the present value of future cash flows. As a result, pitting your knowledge against everyone else is a loser's game.
The future is unknowable and there are risks inherent to that. Don't waste time trying to avoid market downturns or predicting changes in the economy. Focus on things within your control such as risk exposures, costs, taxes and investment behavior. When building your portfolio, understand that it will rise and fall with the overall market, but is designed to weather volatility on the way to meeting your longer-term financial planning goals.
Turn Off The News And Close Your Finance App
The Digital Age has made access to stock market data and real-time portfolio values increasingly easy. The problem is that the more we check in on market movements, the higher our chance of seeing a loss and the more susceptible we are to making mistakes - this is referred to as myopic loss aversion.
I'm not suggesting that people should never read the paper and only look at their portfolios once every ten years - although I wouldn't discourage it - but the worst behaved investors are those that are evaluating their portfolios over short time periods.