If you’ve watched the news in the last few weeks, you probably haven’t missed the allegations that President Trump may have influenced a foreign nation to seek out information on one of his political opponents. The inquiry may lead to impeachment proceedings; however, it may be unlikely the Republican-controlled Senate will convict and remove him from office. Adding to the sensational news, President Trump has warned that “the markets would crash” if the Democrats were to impeach him.
While political turmoil makes for entertaining television, market and economic fundamentals generally rise above political shenanigans. Our country has faced impeachment proceedings before with President Clinton and President Johnson. The impeachment process against President Nixon never came to fruition as he resigned from office. Generally, the economic backdrop already in place when impeachment talks begin will prevail. At the end of the day, who the President is has little to do with the performance of your portfolio.
Furthermore, if you are concerned about market volatility — now is not the time to turn your portfolio inside out or deviate from the financial plan you have in place. If you are following an investment philosophy such as the Ten Year Rule, your financial plan is based on your needs and situation — money you need within the next 10 years should be in fixed-income investments, held to maturity, to protect the principal. Any money you do not need within the next 10 years should be invested in the stock market for growth. Ideally, you establish your plan based on your spending needs, you implement that plan, and then maintain and stay the course through political news cycles.
Just because you are “staying the course,” doesn’t mean that you cannot make tactical moves in your portfolio to take advantage of strong market sectors during economic cycle shifts. For example, many investors are expecting a slowdown.
It has been since March 2009 when we last saw a market decline of at least 20 percent. While the market, as measured by the S&P 500 Index, came close with more than a 19 percent decline during September through December 2018, the market is currently down around 4 percent from its most recent all-time high on July 26, 2019. However, manufacturing activity has been slowing around the world, and our trade war with China is weighing on corporate earnings and global economic growth.
If you have been placing seven- to 10-year money in an equity income portfolio to capture higher returns than Treasury bonds currently offer, you may consider raising your liquidity ensuring that money you need within 10 years is in bonds or CDs that mature when you need the cash. The purpose of having 10 years of liquidity is to avoid having to sell stocks when prices are down. If you sold today, you may not regret selling now; however, waiting until the market declines 10 percent could be a mistake.
Likewise, if you have money that you have been keeping on the sidelines, you may consider accelerating your dollar-cost averaging money into the market to capture some of the lower prices caused by volatility. You may also choose to shift more money into sectors that have traditionally weathered bear markets better than others, like Consumer Staples or Utilities.
Portfolio allocation and financial planning require both strategic planning and tactical moves to maintain the risk/reward balance investors seek.