In the immediate aftermath of Donald Trump’s unexpected election as President of the United States, global stock prices are experiencing substantial short-term volatility. As always, when events create this kind of volatility, we think it useful to step back and think more long-term with regard to your investment portfolio. Here are some points worth considering:
- The meaning of “big” declines: While the media likes to present declines in large numbers, a 900 point decline in the Dow Jones Industrial Average (DJIA) is a 5% decline. That means a portfolio allocated with 50% in stocks and 50% away from stocks should show a decline of 2.5% — significant but not devastating. The value of an appropriate asset allocation – for mitigating risk and cushioning against volatility – is always most clear when stocks experience substantial declines.
- Your time horizon as an investor: It’s always important to understand how much of your money you’ll need to use, and when. The further away in time you need to use it, the more you can think of yourself as a long-term investor — measured in years, not days.
- Historical perspective: At the end of October 2008, just before Barack Obama was elected President, the DJIA was 9,325, in the midst of an historic decline from 13,265 at the end of 2007 caused by the financial crisis of that time. In those first few months of the Obama presidency, the DJIA fell to as low as 6,547 in March 2009, or 30% below October 2008. Since March 2009, the DJIA has advanced to over 18,000, a gain of almost 200%. An even more recent example of short-term volatility that didn’t last was the late-June “Brexit” event, where Britain voted to leave the European Union. Despite a nearly 5% decline in the days immediately after Brexit, stock prices are now higher than they were the day before the Brexit vote.
We recognize that, for many people, this election result is about much more than finances and stock prices. We understand that initial reactions can be powerful and offset longer term thinking. Uncertainty about what the future holds is always uncomfortable. But planning thoughtfully for an uncertain future is an important part of our work together. As investment advisors, we continue to advocate a long-term approach, built around appropriate asset allocations. We are, as always, available to speak with you if you’d like to talk further.