The Informed Investor

Financial Planning: How to Invest During a Trade War

Randy Garcia, Founder, ICC

December 24, 2019

While the trade war with China has been grabbing the headlines, President Trump has been firing serious tariff warning shots at several regions, including Europe(1), Mexico(2), and Canada(3), over the past months. While the situation continues to evolve, it’s likely that tariffs and trade wars will remain a hot topic for the foreseeable future. So, many concerned investors want to know if they should be changing their financial planning and investment strategy in response to this situation.

Our take?  First, relax.  Reacting, especially in panic, is perhaps the worst thing you can do.  If you’re an investor, that means you should be in the market for the long term, so short term reactions in response to news are usually counterproductive.  Being a long-term investor is totally different than being a trader, who usually has a much shorter investment horizon:  months, days, even minutes.  What matters on those time frames becomes a blip when looked at over years and decades.

Then, keep in mind that much of the volatility you see isn’t even generated by human investors or traders.  Instead, that volatility is often caused by computerized trading.  An estimated 90% of the volume that drives day-to-day market movements is automated.(4) These algorithmic trades are often driven by technical factors that are not even considered by regular human investors.  Keep that in mind that these automated trading programs can contribute to the volatility you see in indexes.

When it comes to trade wars or anything else in today’s news, it’s important to always keep your long-term investment strategy in mind.  This should be laid out in an Investment Policy Statement that was developed for you.  It  is a critical document that you should and refer to often, as it an help minimize your stress during times of market volatility.

But we do realize that it is hard not to get emotional when the Dow drops a large percentage.  The fact is that the market does bring out fear and greed in everyone.

These are the times it is helpful to get a little more perspective.

First, realize that the world has always been a volatile place.(5) At any given moment, there are wars and conflicts occurring, economies expanding and receding, and new technologies and breakthroughs totally disrupting the way we live and work.  Various “experts”, along with the media that amplifies their message, have for long been warning of market crashes. Sometimes they get it right; usually they don’t. But if you are invested in stocks, this is not unusual.  This should be expected.  As a long-term investor, you need to not only weather such volatility, you need to plan for it.  It’s normal market behavior.  Nothing goes up in a straight line.

Second, the economy in the US is currently, by most measures, doing well.  Employment and consumer spending are strong, inflation is modest, and wages are increasing. While a trade war could dampen some of this economic activity, the actual impact may not be as big as it seems at first glance. Total foreign trade only accounted for about 12% of the total GDP(6) in 2018, and according to the Census Bureau(7), exports from the U.S. to China account for less than 1% GDP.

Third, economic cycles are an inevitable reality. Just like running a long race, there are times you move ahead but there are also times you need to rest.  That’s how the market works, too. Over the long term, a trade war will also just be a blip on your investment radar. If you are properly diversified and investing according to a well-designed financial plan and investment policy statement, then you should be well-equipped to weather any downturns.

However, there is an important caveat here:  your investments need to be structured correctly in the first place.  That means they need to be specifically chosen so they are appropriate for your goals and objectives.  You cannot always assume that your advisor is doing this, or that the mutual funds and ETFs picked for you make you automatically well-diversified.  Many people learned this lesson after 2008, when those with advisors had large losses, too.

That’s why you need a comprehensive financial plan and investment policy statement that is created specifically for you.

After over 40 years in this industry, and managing over $1 billion in investor assets, I’ll pass on this piece of advice:  an ounce of prevention is really worth a pound of cure.

By that I mean you have to keep your hands on the wheel, even if you have an advisor you trust. Your money is too important and no one can afford to lose money they can’t easily make back.

Is your portfolio designed properly based on your specific objectives and risk tolerance?  How often is it rebalanced?  What about the fees and expenses you are paying—are they reasonable?  If not those can do more damage, year in and year out, than any trade war will ever do.

The problem is that we have a financial industry that is fragmented.  There are fee-only, fiduciary advisors like ICC that legally are obligated to do what’s best for you.  But we’re only a fraction of the industry. There are also thousands of advisors out there that are not legally required to put your interests first.  So they often don’t.  And that’s how you can end up with a portfolio that isn’t designed to weather the market’s ups and downs.

So if you’re not fully confident that your portfolio is well-designed, go over that with your advisor.  If in doubt, it’s always smart to get a second opinion.

 

  1. Kollewe, J. (2019, July 3). Donald Trump threatens new tariffs on $4bn of EU products. Retrieved December 24, 2019, from https://www.theguardian.com/business/2019/jul/02/donald-trump-new-tariffs-eu-cheese-whisky-aircraft-subsidies
  2. Bredemeier, B. K. (n.d.). Trump: “More Likely” Tariffs Will Be Imposed on Mexican Products. Retrieved December 24, 2019, from https://www.voanews.com/usa/trump-more-likely-tariffs-will-be-imposed-mexican-products
  3. BBC News. (2019, May 17). US lifts steel and aluminium tariffs on Canada. Retrieved December 24, 2019, from https://www.bbc.com/news/business-48309703
  4. Has automated trading hijacked the stock market? (2018, February 8). Retrieved December 24, 2019, from https://www.weforum.org/agenda/2018/02/has-robot-versus-robot-trading-hijacked-the-stock-market
  5. Withnall, A. (2016, August 22). Global Peace Index 2016: There are now only 10 countries in the world that are actually free from conflict. Retrieved December 24, 2019, from https://www.independent.co.uk/news/world/politics/global-peace-index-2016-there-are-now-only-10-countries-in-the-world-that-are-not-at-war-a7069816.html
  6. Bond, C. (2019, August 27). Opinion: The economy is just fine, despite the trade war. Retrieved December 24, 2019, from https://www.marketwatch.com/story/the-economy-is-just-fine-despite-the-trade-war-2019-08-27
  7. Branch, F. T. D. D. (n.d.). Foreign Trade – U.S. Trade with China. Retrieved December 24, 2019, from https://www.census.gov/foreign-trade/balance/c5700.html

 

 

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