Trump and Investing

November 7th, 2016 by Potato

Someone taking the course asked this question, and I’ve seen it in multiple other forums lately: how would a Trump win in the election affect my investments? (Or similar ones like should I sell or should I delay investing until after the election?)

This is the sort of question that is very natural to ask, especially if you read the news or watch TV — the business entertainment channels are full of talking heads discussing these sorts of events and what effect they may have on markets. But remember, there is always a Trump (or Brexit, or sequestration, or imminent recession, or rate hike, etc., etc.).

It’s very easy to see some cause of uncertainty and doubt and let that translate into fear of investing (or staying invested). But there are some much better questions to ask yourself before selling in fear over a certain event:

  • Do I believe the evidence that short term events are extremely difficult and/or impossible to successfully trade?
  • Is the risk already “priced in”?
  • What happens if I’m wrong? For the 2016 US election example, the S&P500 is down about 3.5% on the month as I write this. How big of an effect would a Trump win be? What’s the likelihood of that? It may be partly priced in already – and then if Clinton wins, the market may snap back up. It may even snap up if Trump wins.
  • What happens if I’m right?
  • Do I want to open that door? This is perhaps the most important question of them all. Trading on short-term fears is a behavioural finance mistake – you have a long-term plan that involves expecting events like this and riding through them. Even if this time you have correctly read the situation and have insight others in the market lack and you are positioned to make money (or avoid a loss) from your brilliance, do you want to open the door to this kind of activity?

Remember, most of the time most people get these kinds of moves wrong and will end up doing worse than if they had just held on. And getting one move right and making money at it can paradoxically be bad for your long-term plan, because it’s very hard to believe after that fact that you were either just lucky, or that this was that one time when your intuition/analysis was superior to everyone else’s. So the next time some short-term event comes along, you’ll be more likely to make a hypothesis and react, rather than sticking to your long-term plan. Even if you lose more money on the next three events than you saved on the first short-term trade, if you’re like most humans you’ll still be tempted to act on your feelings for the fourth event, because that first success convinced you that this was a smart thing to do.

This philosophy and investing approach means that there will be a time when you “just knew” that some terrible thing was going to happen before it did. You may kick yourself for not acting… but try to remember all that other things you “just knew” were going to happen but didn’t. So maybe you will lose some money next week because of fear surrounding the election (or maybe not – who knows!). But by sticking to your long-term plan anyway you’ll also save yourself from that time when the talking heads said you had to stay in cash after selling out in 2008 until the March 2009 bottom was “re-tested” or that other time when the bad jobs report surely signalled the start of a new recession.

2 Responses to “Trump and Investing”

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