What to do about the Trump tariffs?

Many clients have expressed concerns and requests for what to do in the face of Trump’s tariffs and other possible policies. I recommend doing nothing at all differently UNLESS you believe your personal situation will change as a result (i.e.: slowdown in Tech or Federal employee purge might hit your job. Have more cash on hand, and keep that resume fresh.)

The case for doing nothing

Markets are generally ‘efficient’ in that all available knowledge is baked into stock prices already. Even if it’s true that investors think Trump (or something else) will tank the economy, those viewpoints should already be in the market’s current prices. There’s no gain for us to, say, try to sell now and buy back later (when..?)

Only ‘surprises’ move the market, and very few of us have enough insider info & wisdom to predict these surprises in advance.

But aren’t tariffs bad for the economy?

Yes, yes they are. All economists generally agree that artificially changing prices is ‘bad’ in terms of economic efficiency. Taxes, tariffs, price controls, etc reduce the amount of free trade that would go on between individuals– including individuals across national borders.***

Either the market has already priced these things in, OR the market doesn’t really believe that Trump will stick to the tariffs in a meaningful way. Trump has already decided to wait a month on the Mexico tariffs, a day before they were scheduled to roll out. I believe that the feedback of markets will hit Trump and his wealthy advisors hard enough that they back off later.

The market (and I) could be terribly wrong, and Trump– or something else– may tank the market for a long(er) time. No one knows, so the best thing to do is just ride out any bumps. The amount of time your money sits in the stock market is the best predictor of your future wealth. Investors who trade the most frequently have the worst returns.

What should I do instead?

Stick to the game plan on what you can control:

(0) Pay off any high interest debt (> ~8%)
(1) make sure you have a cash cushion of 3-6 months’ living expenses on hand. Count what you have in other investments as well when thinking about how well you could weather a financial storm.
(2) max out your tax-advantaged accounts (HSA, 401k, Roth IRAs, 529 plan)
(3) invest the rest in a taxable account if you still have more take-home cash
(4) Enjoy life to the fullest and strike the right balance between spending now on making great memories & living a fine life vs saving for the future.

If you’re not currently a client, or have family or friends that could use a good advisor, contact me to learn how I can help.

COVID and the virtue of doing nothing

Pretend you knew with certainty that COVID was coming and it’s December 2019. Patient Zero just started to feel sick in his home in Wuhan. The S&P 500 is at 3,200. You pull all of your money out of the market, intending to move back in when the pandemic feels over. The S&P 500 craters to 2,600 by Feb 2020, dropping 20%. You pat yourself on a market well-timed, but remind yourself that things could get worse! Schools are closed, unemployment has spiked, and the Federal government is running huge deficits trying to deal with the fallout. Best to wait a few more months.

In July 2020, the market is hovering around 3,400, but you continue to wait: new variants keep coming up all the time. What if a majority of people won’t take the vaccines being worked on, or what if it’s not effective? (The first COVID vaccine didn’t start until Dec 2020. ~80% of schools were still closed in Jan 2021.)

You wait a full year, but by Dec 2020, the S&P 500 has climbed to 3,700, and has never gone below that to date (it’s over 5,000 today.) You missed out on a 16% gain during the year you were out of the market, not to mention the missed dividends, even though you KNEW (correctly) that the pandemic would tank the market. Timing is hard. Better just to buy & hold those index funds after all…

***Microeconomics 101 sidebar: If you want to buy Canadian whiskey at $30/liter, and the Canadian Club people want to sell it to you at that price, adding a 25% tariff to make it $37.50/liter cuts out all those Americans that would’ve been happy to pay up to, say, $36, but not $37.50. This loss of trade means someone who valued the whiskey at $35/liter loses out on his $5/liter ‘gain’ above the original $30 asking price.