Donald Trump has won the United States of America’s (USA) presidential election. This has caused many investors to wonder if they should sell off their stocks and go into lower risk investments like gold or just hold cash. The reason for this – Donald Trump’s seemingly hardline stance on numerous political and economic issues.
It’s easy to say something like “stick to your long-term investment goals and you will be fine”. It’s much harder to actually do it. The fact is that investors do not like uncertainties, and given that Donald Trump’s election was a surprise result, the investments markets witnessed investors’ flight to safety.
At DollarsAndSense, we advocate that people stick to their long-term investment strategy, and try, as emotional as it is, to resist being swayed by short-term impacts on their investments. So whether you were expecting or not expecting or happy or disappointed with Donald Trump’s election victory, here are some things you should be keeping in mind.
Do Not Be Emotional – It Rarely Pays Off
On 8 November 2016, after Donald Trump looked to be taking the lead to become the 45th president of the USA, people started panicking and selling. The futures market of the S&P 500, an index composed of 500 of the leading US companies, plunged as much as 5%. This affected markets that were open in Asia with many mimicking the selloff in USA.
When the stock markets finally opened in the USA, on the first day after the world knew who the next president there would be, the S&P 500 index actually soared, reclaiming back the 5% it lost the day before and adding another 1.1% to end on a better note.
Investors should not constantly worry about short-term happenings, especially when they do not really affect the fundamentals of businesses to continue being successful. Just this year, Brexit was another example, when markets fell over 5.5% in the following two session post results, only to reverse losses and even add gain in the next two sessions.
More examples can be cited in the past – be it political upheavals, economics-driven crises or even natural disasters. These events shows how investors should not be emotional in their investment decisions. They should stick true to their long-term strategies and ride out the short-term volatilities since it rarely pays to be emotional.
Unlike many other things in life, your gut instinct seldom pans out well when it comes to investing.
Do Not Try To Time The Market
Timing the market is a wild goose chase.
No one can predict the future, not us, not Warren Buffett and definitely not the average retail investor. If you’d come to us before the USA presidential election and asked if what we thought would happen to the stock markets if Donald Trump wins, I assure you we would have unanimously agreed there would be losses.
Fast forward to today, and the S&P 500 is up 1.2% since the results were out. The most important lesson we can take home from this is that nobody can predict the market’s movement. Hence, none of us will ever know when is the best or worst time to invest.
We simply have to rely on our long-term investing strategies to navigate the ups and downs for us.
There is a study on this done on the MSCI Asia Ex Japan Index. Investors who invested since 1988 will be sitting on an annual return of 5.8%. But had they decided to time the market and lost out on the 20 best best performing weeks, which represented just 0.3% of the time within 28 years, they would have significantly returns to just 0.4% per annum. What this means is that much of the gains made over the past 28 years can be attributed to just a tiny percentage of good performing weeks. Stay out of them and your returns will be in troubel.
You can read the full article below.
Your Long-Term Investing Strategy Should Include Reviewing Your Portfolio
Firstly, we need to know what a long-term investment strategy looks like. Your investment strategy will be dictated by the kind of investor you are.
Some factors include:
– The more sophisticated the investor is, the more complex the financial products they can be investing in. Do you know about the global markets? Do you know about individual sectors? Do you know the products that exist – indexes, stocks, bonds, properties, REITs, options, derivatives?
– Your stomach for risk – are you able to take on more risk to receive higher returns, and also higher probabilities of heartaches?
– Your goals – are you looking to build passive income? Are you looking to save up for a child’s education fees in the future? Are you looking to just build up your portfolio for the long-term?
– Your age – typically, investors should be taking on less risk as they age. This is because time is not on their side to smooth out returns in risky investments over the long-term. Younger people also generally have less financial responsibilities.
So after setting a long-term investing strategy in place, does this mean we will definitely be successful no matter what we invest in?
That was a rhetorical question. Basically, we still have to continually review our portfolios and make the necessary adjustments. From wanting to take on less risk and saving more after having a child or buying a home, to selling certain investments we believe will not perform, or even to selling our holdings in one asset type to invest in another as we age.
It is important to remember these decisions should not be taken on a whim. Rather they should be taken on as part of a periodic exercise, every one to two years, when we review our portfolio.
Want to know how Trump’s election will affect your investment portfolio? And what you should look for when choosing winning stocks given the uncertain circumstances in the financial markets? Join us on 16 November in our DollarsAndSense 90-min series – “Guide To Choosing Winning Stocks,” co-organised with SGX | My Gateway
Date: Wednesday, 16 November 2016
Cost: $10 (inclusive of refreshment)
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