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January 31, 2018 | How to Stop Worrying

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Love him or hate him (even his wife can’t decide), Trump’s been catnip to the markets. Last year the Dow romped 25% higher with the S&P not far behind. More than 5,000 points piled on the DJIA and it’s recently pushed through the 26,000 mark. Historic.

There’s more.

  • America added 2,000,000 jobs last year.
  • The unemployment rate, at just 4.1%, is considered, technically, to be full employment.
  • The economy grew enough for the Fed to start unwinding monetary policy. Interest rates have increased four times in about a year. More to come.
  • Corporate taxes were pummelled, down a stunning 40%.
  • Companies are making serious money. Profits for S&P companies have risen 9.5%, the best performance in six years.
  • Consumer confidence recently hit the highest level in 16 years. Since over 70% of the economy is the result of consumer spending, it’s big news. Car sales and real estate show it.

This is partly the Trump legacy. Partly the Obama hangover. It’s what happens after a long and protracted recovery when the switch is finally flipped. The current president may be an utter whackjob, misogynist, xenophobe and liar, but he represents something craved by a populace tired of moany whimpers. As this blog pointed out when the Trump rally began, he’s the bridge from a low-growth, low-rate, low-inflation, low-return world to one of expansion and excess. And more to come.

Danger looms, of course. Cutting taxes without cutting spending is a pox on the young. Fatter profits, rising markets and surging rates mean more volatility. Tweets, bad judgment, hubris, Mueller – Trump could succumb to any of them. Camelot could be done, fast.

But Trump is not the economy, nor the fundamental reason investors have made out famously in the past year. The world’s growing again, which is why commodity prices are way up. Central banks everywhere are weaning people off the teat of easy money. Deflation has been supplanted by inflation. Innovation and technological advance are at a fevered pitch. The green shoots we strained to see after the credit crisis are now thriving trees. Trump just found the path there.

So how to invest?

Simple. Build a balanced, diversified portfolio of low-cost, tax-efficient exchange-traded funds and ignore it. Hold safe stuff as well as growth stuff. Don’t speculate or gamble. No weed or crypto. Unless you have seven figures of more, don’t buy individual stocks. But don’t overload on low-yield bonds, either. Don’t flip, time the market or – especially – be motivated by emotion.

There was a good reminder of that this week. For the first time in ages stock markets went down. Hard down. The Dow shed 400 points during Tuesday for the first significantly crappy day in months. This was after an astonishing 6% rise in a single month, and things started shooting higher again when trading started the next day.

But it was enough to stimulate the little hairs on the necks of unconfident men.

Should a one-day drop on the markets scare you?

“Absolutely you should be worried,” one Canadian advisor blogged to his clients on Wednesday morning. “Especially if you are over-weight equities in your portfolio… We have been telling anyone who will listen that we have thought and continue to think that stocks are expensive on a number of metrics.”

Obviously someone believing markets “are just too expensive” for the last two years has cost herself a little over 40%. And there is more to come, for all the reasons mentioned above. The Dow at 26,000 is far from being finished, as the Trump tax cuts have not even yet taken effect. The TSX is actually entering an oversold condition and has a ton of upside. Big value in Europe. Emerging markets have been star performers, and higher commodity values are likely to push them higher.

No investor whose growth assets are correctly balanced with safe ones or who has proper diversification between asset classes, currencies and countries need lose sleep. Just make sure you don’t have an advisor who tells you to worry every time markets shed a few hundred points.

Volatility is okay. Market turmoil is actually normal. Lately we’ve been spoiled without the usual 10% annual correction to separate the cowboys from the cows. As bond yields spike, you should expect stocks to wobble more, since investors can collect good interest with less risk. The key to good investing, as in the rest of life is to stay calm, balanced, and keep your pants on. Especially that.

The Trump effect will certainly survive Trump.

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January 31st, 2018

Posted In: The Greater Fool

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