Clarity
It became abundantly clear last Wednesday evening that there was a giant gap between what traders expected to happen to U.S. tariff policies and what actually happened to U.S. tariff policies. And traders don’t like negative surprises.
The irony is that for months traders have been clamoring for clarity over seemingly random tariff proclamations, but the clarity they received is not the clarity they desired.
Where do we go from here?
The rapid repricing of company stocks on Thursday and Friday tells you exactly how traders feel about the new tariff policy. They see a lot of risk to corporate earnings, especially if other countries retaliate with tariffs of their own. They see a potential budding recession. They see an increase in global friction. They no longer are looking through their greed glasses, but have instead donned their fear frames.
If an impactful number of tariff-avoiding trade deals are struck over the next few days and weeks, traders’ current dour mood could improve somewhat. If other countries opt for a more confrontational approach, there could be another bout of selling. This is unknown.
As with all traumatic market events, it is not the event itself that is likely to permanently derail your long-term financial plan. It is how you react to the event.
We all know that investments in stocks are historically short-term risky but long-term returny. That is easy to say, but much harder to live when the screaming headlines and social media posts create emotions that are justified with “facts.”
What occurred last week is simply short-term risky assets acting risky in the short-term — they have simply fulfilled their reputation and met our rational expectations. The challenge is that after a long enough stretch of greed, some people can be caught off guard by the reappearance of short-term risky because they were enjoying the returny.
This is why our disciplined investment process ensures money you may need within the next three years is invested in something with very limited downside potential. This is true in times of greed or times of fear. Short-term risky is not for short-term money.
With your cash flow needs for the next three years relatively secure, we layer in assets with slightly more risk and return potential to cover the next four years of your cash flow needs.
Finally, whatever is left in your portfolio that you do not plan to use for cash flow for at least eight years is allocated to long-term returny (and short-term risky) assets.
Thus, while weeks like last week can be emotionally charged, the correct approach is to reflect on how market events in short-term risky assets truly impact your current cash flow for the next seven years [hint: it shouldn’t if your plan is correct]. Then, and only then, can you take a deep breath and focus on the opportunities that such market dislocations may present for long-term rational investors.
The last week has been rough, no doubt. The clarity we received was clearly not the clarity traders expected.
However, even if the headlines get worse from here, the odds of a resolution within the next 8 years is still relatively high. This too shall pass. That is the clarity we all need.
Quote of the week: Warren Buffett: “When investing, pessimism is your friend, euphoria the enemy.”
Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Stock investing includes risks, including fluctuating prices and loss of principal.
Past performance is not guarantee of future results. All indices are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.
Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Photo Credit: iStock 520639965
ART: 722071-1
