My investment plan for an unpredictable presidency

Donald Trump’s modus operandi is to move fast and break things. That’s not necessarily a bad thing. Some things need disrupting and unpredictability can keep us on our toes. On the evidence of the first few days of Trump 2.0, the next four years will be a wild ride. But investors should not make the same mistake they did in 2017. We may not know where the new President’s attention will fly to next, but we do know that he sees the stock market as a barometer of his success. It may not look like it at times, but when it comes to managing our money, we’re on the same side.

It's sometimes said that markets hate uncertainty. That’s not true. Markets neither like nor dislike the chaos that can be created by mavericks like Trump. They simply respond to it - often excessively - in both directions. The ups and downs of the market are the price investors pay for the long-run outperformance of shares. Volatility is just another word for opportunity. Our mistake is to think it’s the same thing as risk.

• Get expert insights straight to your inbox with our free investor emails

Investing in a perpetual state of uncertainty is the investor’s lot. So, how can we manage our way through the next four unpredictable years? Here’s my plan.

The first thing to realise is that second guessing the President is a mug’s game. He probably doesn’t know himself what he’s going to say or do. So, trying to anticipate any particular outcome is pointless. If we are not wrong, we will be right but at the wrong time, which is just as bad. In the wake of the Normandy landings, Eisenhower admitted that the D-Day plans were largely worthless. But he went on to say that ‘planning, however, won the war’. We may not be able to predict the detail of what the next Presidential term holds in store, but we can prepare. The two are not the same thing.

Warren Buffett famously has a ‘too hard’ box on his desk. We can learn from this the importance of accepting the limits of our knowledge. We are wise not to move outside the boundary of our circle of competence. In the context of Trump, that might mean not trying to guess whether tariffs will be inflationary or deflationary. The answer is plausibly both, perhaps inflationary for a while and then deflationary in due course. It certainly means not having a view on whether the dollar will be stronger or weaker in the long run. It suggests not trying to understand ‘what the markets are telling us.’ They don’t know either.

If we don’t know what’s going to happen, we have even less idea of when. Timing changes in the market is another fool’s errand for investors. Since the 1920s the US stock market has returned around 12% a year. But that actual return has probably only been delivered on a handful of occasions. The dispersion around this average is wide, with annual falls and rises of as much as 50%. What makes things even harder to predict is the concentration of returns. A handful of days’ exceptional performance is responsible for a big proportion of the overall return. Miss these and you will struggle to keep pace with the market. And it is very easy to miss the best days because they are very often adjacent to the worst ones and occur when the outlook is most unpromising. Good luck anticipating them.

The good news is that good, or lucky, timing is helpful but not essential. As I noted last week, when looking at lessons from the Covid years, time in the market is more important than timing the market. Even if you had invested just before the pandemic plunge, you are safely above water now, only five years on.

• Read: What next for the US? Three fund ideas

The third part of my Trump plan is to understand what I need financially and when. It really matters whether you will need to access your savings in the next few years or not for another couple of decades. If, like me, you are close to or at retirement age then the answer is probably a bit of both. I need a buffer so that, if the market takes a plunge, I can take it in my stride. While I’m still working, my salary covers that off. But when I stop, I will want at least a couple of years living costs, maybe more, in highly liquid assets like cash or short-term securities. That way I won’t do anything silly with the greater part of my savings that I don’t need to touch for years to come.

A fourth strategy is to rebalance regularly, if not frequently. Once I’m happy with my long-term asset allocation, I will periodically revert to it. That way, I will benefit from the market’s inefficiency. Shares are more volatile than either corporate earnings or GDP. Rebalancing allows me to top up on investments that have fallen behind and trim those that have become over-priced. Humans run in packs, and the temptation is to stick with what’s popular even as the investment case for doing so is fading. Rebalancing is a simple, mechanistic way of introducing discipline into our portfolios. We all invest better when guided by rules, not gut instinct.

Finally, I intend to play to my strengths. My retirement fund has an investment committee of one. I’m not mandated to hold anything that keeps me up at night. That means there’s only one person to blame too. And whatever he does or says, that person is not Donald J Trump.

This article was originally published in The Telegraph

• Podcast: The Market and The Donald – plus, Covid five years on
• Read: Tom Stevenson’s latest Investment Outlook

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.