Despite virtually every opinion poll and every media “expert" predicting otherwise, Donald Trump will be sworn in as the 45th president of the USA in January. The media is full of speculation about what he might do in office – from ripping up trade treaties to building walls. But remember that those telling you what happens next are often the same ones who told you this wouldn’t happen in the first place.
So how should you, as a long-term investor, approach all this uncertainty.
Uncertainty is something I know a bit about. Helping people make big financial decisions when very few things are clear, has been my job for 30 years. Because after all the fancy calculations, financial theories and impressive looking forecasts, no one has any idea what the future holds.
This election result is just another example of it.
To be a successful long-term investor, you must embrace this uncertainty.
To do this is not always easy. In fact, the reality of uncertainty scares us. We don’t like not knowing what the future holds. So, to accommodate people, an entire financial forecasting industry has emerged telling us stories about the future so we can pretend we know what will happen. We have entire TV stations and websites devoted to it - updates on a minute-by-minute basis, continual market forecasts and so called experts telling us what to expect.
I watch on in despair at this nonsense!! Forecasters are terrible: I have written this too many times, but it bears repeating: Forecasters aren't very good at forecasting. We have learned this about economists, market strategists and now political pollsters.
So why do we listen?
Because we would rather be certain and wrong about the future than admitting we have no idea and coming to grips with those feelings.
But here is the reality: Uncertainty is reality. Just about everything else is made-up.
So, among the many questions I’ve been asked about this election and what it means for investors, the only one I’m qualified to write about is this:
How do we learn to live with uncertainty?
Here are some tips I guarantee will help you do that.
First, Get A Plan
Having an investment plan in which you are reasonably confident helps calm free-floating anxiety and address questions about what to do in reaction to events over which you have no control.
That is the easy first thing: Do you have a plan about your investments and overall financial outlook?
An investment policy statement can help map out the direction investments should take. It's also useful to have handy when anxiety starts to mount about the economy. You are prepared for contingencies and worst-case scenarios.
The longer the holding period, the less the probability of losing money. For example, shares produce a better retrun than a cash investment around two years in every three. Over 15 years periods though, shares beat cash 96% of the time (click the image below for an enlarged version)
Get Your Asset Allocation Right
Asset allocation is what financial professionals call spreading money around various types of investments, such as large-cap stocks, small-cap stocks and high-quality corporate bonds. It should be based on your goals, time frame and risk tolerance.
Think about worst-case scenarios, such as the recent financial crisis. Sharemarkets lost more than 50% between Oct. 1, 2007, and March 5, 2009. Some portfolios lost more than that and some lost less. Smart asset allocation and diversification can lower the risk in your portfolio and improve returns.
Have A Process For Rebalancing
Maintain a disciplined investment approach. Stay invested and reallocate your portfolio to its intended target allocations if they get out of range. Rebalancing may reduce risk and is an automatic way of buying low and selling high.
In Times Of Duress, Use Market Volatility As A Gauge For Your Risk Tolerance
Here is a really important one. When market conditions return to calm, use your new found experience to fine-tune your approach to investing to be better prepared next time.
Finally, markets can and will go mad from time to time.
The best defence against madness is to understand the history of financial markets.
Be comfortable that it’s all happened before.
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