Handling Market Volatility

As you can imagine I’ve been getting the, “What should I do about President Trump?”, question quite a bit lately so I wanted to briefly examine it here. I’m guessing this won’t be my last post on this topic.

Frankly, there’s no simple answer to this question. Let me also say that I try not to let my personal political views bubble up too much in my work. Some amount is unavoidable but I’ve always felt it’s more important to be professional and above all practical in my work of providing financial guidance and prudently investing other people’s money. The correctness of an administration’s policy isn’t as relevant to me as its potential or actual economic and market impact.

That said, regardless of your political persuasion it’s impossible to ignore that the Trump Administration is shaking things up. That’s obviously destabilizing for markets in the short-term as various market participants scramble to determine what it all means for the economy, corporate profits, and market prices. We saw that dynamic play out yesterday following the announcement over the weekend of large tariffs that are planned to be applied to various products from Mexico and Canada, and that according to the president will cause pain for some Americans.

The S&P 500 and NASDAQ indexes were poised to open down by maybe 2% after prices generally fell in foreign markets over the weekend. But as Monday progressed, prices improved based on soothing words from the administration and a general sense of cautious optimism that President Trump isn’t looking to start a trade war, is maybe using tariffs as a short-term negotiating tactic, and that the situation might not end up being as bad as originally thought. All told, the major stock indexes closed down yesterday but not by as much as some of the early news suggested. Bonds were up a little on the day, providing some typical shelter that we haven’t seen much of lately.

However the tariff issue ultimately shakes out (the news is fluid as I type this morning, while markets are set to open pretty flat), investors are left to deal with a lot of noise in the meantime. So what are we supposed to do about this type of headline risk?

I think the most important question to ask yourself is if you’re a long-term investor. That might sound silly given the context but it’s good to remind ourselves of our outlook from time to time. A long-term investor should be willing to endure short-term volatility and uncertainty, and sometimes extended downturns in an effort to make more money than can be made from just leaving cash in the bank.

Assuming your answer is yes, and you’re worried about market risk related to the Trump Administration, you should consider the following steps to review and maybe shore up your portfolio.

Is your mix of stocks and bonds appropriate for your situation? Are you comfortable with how it looks right now? This isn’t about recent investment performance. Instead, think about risk management.

Rebalance your portfolio to decrease risk. Last year was good for stocks so there’s likely some opportunity there. You could also sell from stocks that have performed well and use the proceeds to pay down debt or help fund something real like a vehicle purchase or a vacation.

Do you have a high percentage of your portfolio in stocks? If so, and maybe in any case, what does your sector and style breakdown look like? How about foreign exposure?

Do you have too much (relative to a benchmark like the S&P 500) in AI-related stocks, tech stocks more broadly, or even concentrations in Consumer Discretionary or Industrial stocks that could be first in line to get whacked by tariffs? These “overweights” can come from individual stock positions or be buried within the funds themselves.

Are there individual stocks within your portfolio that make you uncomfortable? It can be challenging to pare these names back or eliminate them entirely, but the first step is determining if it’s an issue. Your humble financial planner has the tech to do this easily but look at holdings lists for funds in your portfolio via a Google search.

Do you have too much allocated to small- or mid-cap stocks that are generally more volatile and more susceptible to inflation potentially caused by tariffs?

Essentially, review your allocation and look for any flashing red lights, as I call them, or things that stick out when compared to the S&P. If you have some, are they for a good reason like imbedded taxable gains, or are they just “there” and need to be corrected?

Do you have the right amount in bonds? If you’re retired, how much cash do you need from your investments in the coming few (or four) years? I’d argue that if you have at least this amount of cash stored in bonds and cash equivalents like money market funds and CDs, that you should be able to handle pretty much anything that market history has thrown at a well-structured diversified portfolio. Maybe add a little cushion to this if you like. Just don’t go too far because even with market volatility, cash left in your bank account or idling at your brokerage firm will ultimately underperform stocks, perhaps to a large degree. This can easily be accomplished within your IRA and Roth IRA (and your workplace plan), and your brokerage account (with an understanding of your tax situation).

Treasuries and highly-rated corporate bonds have lagged (that’s the kind word to use) but they serve a purpose: they’re a very safe liquid investment and a great store of cash. And shorter-term maturities of less than five years are generally safer anyway, so you could find some shelter there if you like.

For shorter-term bonds I like individual Treasury bonds or even bank CDs, depending on which pays more at the time. In either case, your cash is secured by the Federal government and your interest rate and maturity date are fixed. As I type, I see in the Schwab system that 1yr, 3yr, and 5yr Treasury bonds pay about 4.2% to 4.3%, very close to bank CDs. You could build a ladder of annual maturities going out 3-4 years and decide about reinvesting when each bond matures. It’s an easy and cheap option that should be available in any account type at any major brokerage firm, with the exception being workplace plans. There you might have a money market fund or perhaps a “stable value fund” option. Beyond that, mutual funds and exchange traded funds are good here as well, they just come with some market risk. Vanguard’s and Fidelity’s Short Term Bond funds are good examples.

Are you still saving for a retirement that’s at least a handful of years down the road? If so, you’re still in the accumulation phase so meaningful downside market volatility should be seen as a buying opportunity. Those opportunities usually don’t last long, so regular funding of your retirement accounts is helpful, as is regular monitoring for rebalancing opportunities.

Okay, that’s it for some basic steps to take. You may think these seem standard because they are. These are fundamental aspects of investing that we can control. It’s important to double down on these steps whenever markets (and/or the political environment) get weird.

I’m doing this for you if I’m responsible for managing your portfolio but you’re always welcome to ask questions, to let me know of fundamental changes to your financial situation, industries and companies you’d prefer to omit, and so forth.

Have questions? Ask us. We can help.