Many investors are likely uttering some version of the three letter acronym “WTF” as broad-based and significant tariffs have been announced. Markets are reacting negatively around the globe and worries about global trade wars are swirling. So what should you do? Simple. Relax and Invest With A Plan.
Markets tend to over-react to the news and then as things settle in and a longer-term picture emerges, markets will adjust to this new reality. It is critical that investors don’t try to chase a market; it moves faster than we ever can. It is also important to step back from what feels like a crisis and approach the situation with logic and a planned, systematic process. In fact, if you have a long-term plan for your finances and portfolio… that planned, systematic process is already in place and operating!
While we haven’t seen THIS before (actually we have!), we’ve seen this before. The market is reacting minute-by-minute to a constantly changing set of variables, news and curveballs. The volatility of the past couple of months reflected the on-again, off-again tariff regime coming from 1600, but also corporate earnings, economic data, weather patterns and everything else. The latest round is just bigger than the market expected and so the market has adjusted.
Some folks are referencing the Smoot-Hawley tariffs that were enacted in the 1930s and noting that the average tariff rate just enacted is actually larger than those put in place by Smoot-Hawley. Smoot-Hawley is widely recognized by economists and economic historians as worsening the effects of the Great Depression (note – not that the tariffs caused the Depression). It is possible, maybe even likely, that the US goes into recession as a result of this round of tariffs. Maybe the recession is deeper and longer than it would’ve been otherwise. But again, we’ve been here before. Investors have been through scores of recessions, some caused by normal economic cycles and some caused by external shocks (e.g., Covid pandemic) and some caused by internal policies/shocks (e.g., Financial Crisis of 2008).
The core point is that we’ve been here before and we know how to handle it – we Invest With A Plan. Do NOT guess and move money around based on your emotions. Long-term investors manage their money through a downturn by sticking to a risk profile that is anchored around your long-term goals. Investors take opportunistic action during downturns such as rebalancing and tax loss harvesting.
Take a step back and remind yourself when you will need your money. If you are 30 years old with decades before retirement, worry about other stuff! If you are near retirement, your portfolio should already reflect that and be positioned for the coming change of cash flow needs, but it is smart to re-run the plan and see the actual impact. Short-term market movements rarely derail a long-term plan. And if you are already retired and using your portfolio for part of your cash flow, that portfolio is likely not 100% in stocks. Cash flow management in retirement must account for short-term market movements and your portfolio likely has years of withdrawals stored somewhere other than in the stock market.
When we Invest With A Plan, we can face whatever news and economic uncertainty that arises with confidence. That confidence comes from a systematic process that drives action based on logic, not emotional guesses.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Past performance is not a guarantee of future results. Diversification does not assure or guarantee better performance/profit and cannot eliminate the risk of investment losses in declining markets. Asset allocation does not assure or guarantee better performance/profit and cannot eliminate the risk of investment losses in declining markets.
Image Credit: "WTF - Text" by j4p4n via OpenClipArt and used under CC0 1.0 Public Domain License