Investors who are trying to work out how to navigate Donald Trump’s ability to create drama and chaos are making a huge mistake.
Because of the US president’s novel style, it’s easy to think that what he’s doing is entirely new and will lead to unfathomable consequences.
This prospect, the supposed logic among active investors then goes, means immediate and repeated action needs to be taken.
But, when it’s boiled down, the current psychodrama is essentially protectionism and isolationism, and history shows that no matter the turmoil in markets, they do recover.
What is in short supply right now is patience, but investors will be rewarded if they can resist manipulating their portfolios during a period of high tension.
Echoes of the past
Financial markets have reached crisis points numerous times in recent decades, and even more so over the past 100 years.
Two particular occasions echo what’s going on now; the 1970s energy crisis, and the isolationism of the 1920s.
In the 1970s, when the Arab members of OPEC (the Organisation of Petroleum Exporting Countries) quadrupled the price of oil to $12 a barrel and banned exports to the US, Japan and western Europe, financial markets suffered.
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Knee-jerk intervention from central banks – notably the Federal Reserve – backfired, and policymakers had to retrench as they considered how to jolt the economy out of its stagflation patch.
Looking at the Dow Jones, though, it was bound in a trading range for two decades – from 1960 to 1982 – with multiple peaks and troughs .
Trying to successfully and repeatedly sell at the top of those peaks and buy at the bottom again is virtually an impossible, and expensive, task, and it’s likely anyone trying to do so would have suffered some battle scars.
Patience is a virtue
Likewise in the 1930s, isolationist US presidents were in office during the Great Depression, which began after the roaring 20s abruptly ended, putting a stop to an impressive bull market in stocks.
From the peak of 381 points in September 1929, the Dow Jones plummeted to 41.22 by the summer of 1932.
While it didn’t return to its pre-crash level until November 1954, markets broadly moved upwards in those intervening decades.
Once again, unless an investor sold at the peak and rejoined at the absolute trough, trying to second-guess exit and entry points would probably not have yielded the intended results.
Instead, what would have been more sensible then – and now – is to remain invested in a diversified, low-cost way.
Steady returns
Equity risk premium is the key here.
Even though the passive and active brethren might not agree on much, they do concur that stockmarkets produce positive, risk-adjusted returns for investors over time.
How one harvests these can be contentious, although we are on the side of securing the average, year in, year out, because it is generally positive.
Amid Trump’s tumultuous presidency, it might feel like risk levels are heightened and that more evasive action is required.
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But we aren’t having to rebalance our portfolios more than normal, which indicates Trump is creating more noise than real-world problems.
Our model portfolios offer different amounts of equity exposure, from 10% to 100%, and a four percentage point deviance from each level prompts us to rebalance by selling fixed income and buying stocks.
That isn’t occurring more frequently under Trump, though, and we’re not terribly close to it happening either.
Reassessing risk
This suggests that investors don’t need to take any action to try and out-manoeuvre the 47th president.
Instead, investors should maintain their exposure to markets and keep hold of their long-term outlook.
Rebounds from crises are speeding up too, with stockmarkets fully recovering their global financial crisis losses in five years, meaning investors may not have to wait as long to get back to where they were before a bear market began.
For investors who simply can’t stomach it, perhaps it’s worth revisiting what your risk tolerance is.
Because that’s got nothing to do with Trump, and if he’s not unsettling markets, someone, or something else, will.
Raymond Backreedy is CIO of Sparrows Capital
