For the first time since taking office, investors seemed to have their doubts about president Trump's agenda sending stocks on a downward tumble, at least briefly. A snapshot of the markets post Trump's unanticipated win reveals a steady climb in the Dow Jones Industrial Average thanks largely to his campaign promises to cut corporate and personal income taxes and pare back regulations which would be a boost to business. However, his failure to repeal the Affordable Care Act better known as Obamacare, which also would have cut costs for employers and insurance companies, created cause for concern for investors. The result: eight days of consecutively lower returns.
Nothing terrible happened. If anything, the markets proved their resilience and appear to be rebounding. But what if Trump isn't able to push through tax cuts or deregulation or any of the other promises he made? What if they all go the same way as his failed Obamacare reform or they are significantly delayed? How will the markets respond? What will all those novice investors do?
We now have a whole segment of investors who never wanted to be in the market but are because they have no other alternative if they want to achieve their education, housing, or retirement objectives. Interest rates are so low the yields on GICs and bonds aren’t even keeping up with inflation after income tax is factored in. I certainly have more clients investing in the stock market today than I've had in the past 20 years because of this There Is No Alternative (TINA) environment.
Investors that only got into the market because they don't have any other investment choice to grow or maintain their wealth were jittery even as the markets were climbing. What happens if the markets, which are at best fairly valued and at worse over-valued, correct? Will their nerves get the better of them? Will they make a quick exit? And then what? A market correction could turn into a sell-off panic and nobody wants that.
Plus, they'll be doing the worst possible thing for their portfolios: selling low having bought high. Sophisticated investors will use the opportunity of a dip in the market to buy discounted stocks while inexperienced investors will be left holding the door as they follow the herd and sell.
My approach: Cautious optimism. In other words, have confidence in the market but prepared if things go south. This means never chasing the next hot stock. Instead I look for investments that make sense regardless of any policy change.
I'm not investing based on what President Trump or Prime Minister Trudeau is planning to do. I look at the fundamentals of the company and try to buy companies that are still undervalued -- before the rest of the investing public starts buying. If I've purchased investments when they are still inexpensive, then even if the market corrects, it won't have as big an impact. It's the high priced, over-valued investments that have the furthest to fall.
I also make sure to diversify my investments. It is a low cost way of protecting a portfolio so that a decline in one sector can be offset but an upswing in another. It’s not easy. These investments are hard to find but that's my approach and it's what allows me and my clients to stay the course when markets decline -- as they inevitably will.
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