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“I will call my broker this morning and sell all my stocks,” said first one Facebook friend, then another, the morning after the election of Mr. Trump.
Nothing distorts like an election result. Nothing. Not cataracts. Not broken lenses. Not even a bad photograph. Distortion, especially for losers of elections, causes loss of perspective, misunderstanding of political life, and baseless changes in personal stock market outlook.
Professional investment advisers are aware of the phenomenon, but we need reminding once in a while. A few months before the first election of Bill Clinton, the chief strategist of an investment firm invited questions from his audience. The first question was: “How much will the stock market drop if Mr. Clinton is elected?”
The response was firm, but polite. He said: “Never make an economic prediction based on your personal political bias and preference about the future. Economic events, especially stock market trends, do not correlate to political results. Election results are not a standard for prognosticating the future.”
A corollary would be: Never make an economic prediction.
Perhaps the two Facebook friends were making metaphorical points, simple declarations of frustration, and I do not know whether they followed through. Regardless, they were wrong, in spirit, in analysis and, most important, in not evaluating alternatives. Neither responded to my question—“Where will you put the funds?”—although one seemed to conjecture, “Well, gold, I guess.” Neither appeared ready to ask for professional advice. Their sadness and frustration, their sense of complete loss, their pessimism that a new administration will do anything worthwhile, controlled their entire view of future economic life.
When investors broach this kind of discussion, essentially a request to predict, investment advisers find themselves in a bind. The problem for advisers is that the pessimistic assumption might be correct. So far this year, negative predictions have been wrong, with markets hitting new and historic highs. However, the short-term result changes nothing in the classic risk/reward equation. Risk/reward is constant. A low market, say 7,000 on the Dow, might go lower, and did go lower in 2009. A high market at 15,000 might go higher, and did, recently seeing more than 19,000.
The relevant question for individuals is not whether the market will go up or down, but, instead, “Can I accept the risk?” On any day of any week, the value of an asset might decline. Could be a home, art or coins—anything at all might decline. This constant, if placed in proper perspective, permits investors to make logical choices. If a decline in value, in the context of personal net worth, is somewhat academic, then risk may be assumed.
However, if a decline might have tangible importance, if changes in value might directly or indirectly affect health or health insurance, if a down market might reduce or eliminate emergency funds, or worse, if the investor might be forced to sell a home or otherwise change lifestyle, then the time is right for reducing or eliminating that risk. The right standard is not a political, economic or social event. The correct reference, the standard that makes a difference, is personal life.
No one knows the future, but we do have tools to help manage our commitments to the future. These tools are classic. They have been around forever, so long that mentioning them seems trite, boring, totally common, but here they are: diversify, diversify, diversify. To achieve stability through diversification requires these other fundamentals: patience and perspective.•
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Guy is a wealth manager and author of “Middle Man, A Broker’s Tale.”•
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