Warning! The topic I am going to be discussing may contain information that can be perceived or interpreted as financial advice. I am not a financial advisor and am not licensed to give advice. This is a blog where I give my personal opinions and beliefs. If you agree, disagree, or find anything I say interesting and are considering making adjustments to your investments based on what I say, please speak with a licensed professional before making any financial decisions. As always, any investment has risks associated with them that may result in the reduction or loss of capital.
Now that I got the legal warning out of the way let’s get down to business. The business I am referring to is the economy and President Trump’s ability to move it in every direction with a single tweet. What is the single biggest topic that gives hedge fund managers and financial analysts a nervous cringe once they see it on the president’s Twitter feed, tariffs! Who are those tweets usually aimed at, China!
I went into the topic of tariffs earlier this year and dedicated an entire post to the subject. Please feel free to search my site and read it if you want to learn more about what they are and why they are used.
I understand that financial literacy amongst the population can vary greatly. I will do my best to give definitions when it makes sense and try not to bore you with minutia that may put you to sleep. In case you’re wondering what makes me qualified to speak on the topic of the economy, I will tell you that when I was younger I was a licensed stockbroker who held several positions in the financial field. Those positions ranged from working on Wall Street in several brokerage firms, working as an order taker in a mutual fund company, and finally as a financial assistant in a family-run financial planning firm. While this was many years ago and I have since moved on from the financial industry I still keep abreast of the market and am an avid reader of financial columns and books.
Now that you’ve learned a little bit more about my history let me talk to you about the power of the oval office. It’s huge! The president is a wealthy billionaire and has decades of experience in wielding his finances in ways that either bring wealth or financial ruin to people, cities, and corporations that have chosen to do business with him. A simple search of Trump’s history of business success’ and failures will give you plenty of reading material that can fill up an entire afternoon. By becoming president, his bully pulpit expanded from impacting television ratings for his show Celebrity Apprentice to moving markets on a global scale.
His most recent tariff threat against China caused the Dow Jones Industrial Average (DJIA) to go down 800 points. That was all from a single tweet. Why did the threat of new or additional tariffs against China cause such a volatile downward spiral you may be wondering? The answer has many layers that may not seem interconnected with Trump’s loosely veiled Twitter warning against our largest communist trading partner. Inverted Treasury yield curves, slowing domestic and global economies combined with trading algorithms that lead some analysts to believe we will be entering into a recession soon are some of what caused the market to lose billions of dollars in a single trading session.
If that explanation sounded like a foreign language and you were lost right at the start, don’t feel bad. Most people don’t spend their time watching the financial news networks listening to portfolio managers give their analysis on quarterly corporate earnings or governmental agency reports that cover various sectors of our nation’s economy. What the average person does is look at the news alerts on their smartphones and react accordingly when the Dow goes up or down, not fully understanding why. When they hear news reporters blame it on a tweet from the President they assume that’s the cause and go on about their day, albeit a little lighter in their wallet and heavier in their heart from the insecurity of a temporarily diminished portfolio balance.
There are two combined words that I’m going to bring up to help you refocus your emotions to a more calm state whenever you get anxious about a sudden downward market movement: cost basis.
What Is Cost Basis?
Cost basis is the original value of an asset for tax purposes, usually the purchase price, adjusted for stock splits, dividends and return of capital distributions. This value is used to determine the capital gain, which is equal to the difference between the asset’s cost basis and the current market value. The term can also be used to describe the difference between the cash price and the futures price of a given commodity. For additional information on the subject and to watch a video explaining it further please feel free to visit the site Investopedia.com.
Why do I bring up cost basis? Very simple! Your original purchase price does not change when the market moves up or down. Whether you have an unrealized gain or loss is a different story. What do I mean by unrealized? It means you haven’t sold your investment. You only realize your gain or loss when you sell. Until then, it’s unrealized and your cost basis is not impacted by one cent. So, whenever you get nervous about a down day in the market remember that it’s only on paper.
Why does Trump tweet so often about tariffs using them as a threat? Because he can and it is. As President and leader of the free world, his voice and actions put his competitors on notice. Trump comes from the business world of international real estate. Negotiation through monetary strength is what he understands. Rather than take military action against North Korea, Venezuela, Iran or any other country that war hawks would normally recommend striking with bombs, Trump invokes sanctions and tariffs. While he is not afraid to show military strength as he did when he fired 59 cruise missiles into Syria after reports of Assad using chemical weapons against his citizens, Trump knows the way you truly hurt a country is financially. It involves less risk for us overall and costs nothing monetarily.
How do you create a portfolio that doesn’t stress you out every time the president causes the markets to panic? Great question! Seek guidance from a licensed financial adviser first then diversify, diversify, diversify!
There are three types of investors. People who stay away from financial markets completely and invest in anything else. People who invest in the stock market and like to day trade. That same group tends to believe they can time the market, which is why they do quick trades. Those trades can range from less than a day, week, month or year. The third group is the long-term investors. If you have a company-sponsored retirement plan and invest in it this most likely includes you.
Back to stress and timing. Emotions play a big part in how many people handle their finances. People panic so much when they see major selloffs. To minimize their losses they react with fear and sell their holdings. If they have a loss they cope with the sadness and justify their actions by thinking at least I didn’t lose all of my money. There’s an expression for this type of investing: blood in the streets. Novice investors will react based on fear. Sophisticated investors will see the carnage and wait for the markets to have a major sell-off. The ‘blood’ is the red color of losses that many people took. Once they see things have calmed down investors sitting on the sidelines with cash on hand will jump in and scoop up holdings at a bargain-basement price. A pawn shop is a good comparison. The only time someone pawns off an expensive item for a ridiculously low price is when they are desperate and need money. Don’t be desperate!
Tony Robbins wrote two of the best books I’ve ever read on the topic of investing. If you’ve never heard of Tony look him up! He is a motivational guru and a pioneer in the field of helping people achieve whatever goals they have. Unshakeable: Your Guide To Financial Freedom is the shorter version of MONEY Master The Game: 7 Simple Steps To Financial Freedom. If you only read two books in your life about the topic of investing these should be it. I thought I knew a lot about money and investing before reading these. After reading them I realized how little I knew.
Passive or active. If you are considering investing in mutual funds those are the two types of management styles you need to choose from before you look at which fund to invest your money with. Passive investing means fund managers will create portfolios that have very little transactions and mimic the movements of an Index. How the market goes is typically parallel to how the fund will perform. Active investing is the exact opposite. Those fund managers will create mutual funds that have assets in industries in amounts that can vary and focus their holdings on sectors they feel will have the most potential for growth. Passive funds will have fewer fees as they typically incur fewer transactions. The opposite is true for actively managed funds. Another reason why actively managed funds have higher fees is that the fund managers are partially compensated based on performance. If the fund outperforms the Dow, S&P 500 or any other index, the premium an investor pays by way of higher fees for the greater return is worth the additional cost.
I can go on for hours about investing and how the President has changed people’s financial lives since he has been in office. If you were one of those who sold everything after he won the election you, unfortunately, bought into the doom and gloom of his detractors and missed out on a tremendous economic upswing. If you stayed in the market and saw your portfolio balance grow you also experienced periods of wild volatility that were followed by equal buying opportunities. The best advice I can give you is do not try and time the market. Trump will tweet while most of us are asleep. Computer algorithms will react to corporate earnings reports and trigger automatic sales and purchases in amounts that you and I only wish we could. Create a portfolio with the help of a knowledgeable advisor that is suitable for your age, financial capability, and risk tolerance. There is no one-size portfolio that I or someone else can recommend to you without speaking with you and seeing what your goals are. The one thing you can do on your own is control your emotions. Nothing the president says or does should cause you to lose sleep at night unless it involves sending you or a loved one off to war. Everything else is politics as usual and the markets will do what they always do. Bulls and Bears make money when stocks go up or down. All we can do on the sidelines is plan for the future and keep a cool head. President’s come and go but the market will always be there. Create an investment strategy that can ride out a storm and you will enjoy the sunny weather long after all the tweeting is done. Happy sailing!