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Trade War & Actionable News

Kevin Michels, CFP®, EA 

Since the market bottomed out in March of 2009, it has risen steadily and consistently over the past 9 ½ years with only a few bumps along the way.  We’ve experienced occasional pullbacks and corrections but haven’t entered into bear market territory (20% drop from market highs) for almost a decade.

Despite the outstanding bull market we’ve benefited from, there always seems to be a headline, anticipated event, or news item that has investors and clients worrying about the next bear market instead of enjoying the great run we’re currently in 

The most recent news to fuel the fire of pessimism:  The possibility of a full-blown trade war with China and/or other countries.

The trade deficit with China has been a talking point for President Trump since the early days of his presidential campaign.  He has repeatedly stated that the $375 billion trade deficit is due to unfair trade practices by the Chinese, mainly stealing intellectual property from American companies by forcing them to turn it over as a condition of having a physical presence in China.

In early July, President Trump imposed tariffs on roughly $34 billion of goods from China.  China immediately retaliated with similar tariffs as well.  In addition, President Trump has imposed tariffs on United States allies, Mexico, Canada, and the European Union.

Undeniably, the effects of higher tariffs will be felt immediately.  Locally, KSL recently reported that Salt Lake County has to find an additional $1.2 million in funds to build the new recreation facility in Draper because the cost of steel has risen significantly since they first bid the job.

Companies in various industries will be affected:  farmers, construction companies, automakers, gas and oil companies, etc.

So, what’s next?  Nobody is really sure.  Do both countries work towards a resolution?  Are additional tariffs imposed?  Does this break out into a full-blown trade war?  We would be naïve to think that it wasn’t a possibility.  However, we just don’t know.

This begs the question, what should you do as an investor and what should we do as advisors to adjust for this possibility?

Let’s first address what we shouldn’t do.

First, it’s important to note, that when it comes to investing this isn’t actionable news.  Meaning it doesn’t give us enough information to make an informed and confident investment decision.  There are way too many unknowns at this point.  We routinely stress that the worst thing you can do when news like this breaks is to make quick and irrational decisions.

Successful investing isn’t attributed to predicting if and when certain events will occur and how it will affect the stock market.  That is the definition of market timing and it’s been proven time and time again to be the best way to lose money.

Successful investing is attributed to having an investment and financial plan in place and sticking to that plan during the most volatile and uncertain times, like now.

The majority of the time, the only news that is truly actionable and that you can use to make solid investment decisions, is the news going on in your own personal life.

For example:

I recently met with a client who is planning on retiring at the end of the year.  Understandably, he expressed his concern about the effects a trade war could have on the stock market and the value of his retirement savings.

In this situation, I reminded him that the actionable news is not that a trade war could send the market in a downward spiral, the actionable news is that he is retiring soon.

In preparation of this “actionable news” (retirement), we revisited his financial plan and asset allocation.

The financial plan showed that on top of his social security and pension income, he would need to take an additional $30,000 from his portfolio annually to cover retirement expenses.  After discussing market history and his own risk tolerance, we came to the determination that he would be most comfortable having at least six years’ worth of planned withdrawals in safe assets such as fixed income and cash at all times to weather any extended bear market. 

That meant that out of his $600,000 portfolio, $180,000 would be invested in fixed income, about 30% of his total portfolio.

In the event that a trade war does break out, or the market falls into bear territory for any other reason in the future, he has six years’ worth of withdrawals in safe assets that should hold their value while the stock market recovers.

Instead of continuing to speculate and worry about how the trade situation will play out with China, he was left feeling confident that he had a plan in place no matter what happens.

Now this isn’t groundbreaking, this is simple asset allocation based upon a financial plan.  However, you would be surprised at how common it is for people to make investment decisions based on speculation (headlines, anticipation of events) instead of facts (a financial plan).

In any case, when it comes to investing it’s important to separate “actionable news” from all other news.  This doesn’t mean that it’s not important to be educated on what’s going on in the world, but not everything we read, watch, or hear in the news has investment implications, even if it does create short-term volatility in the market. 

As I stated before, I’ve found it’s very common for people to worry more about the next bear market instead of enjoying the current bull market.  That may be a function of negative headlines constantly dominating the media, but more times than not, I believe it’s rooted in the absence of having a plan.