What the Election Results Mean for Your Investments
THE DONALD IS GONNA BE MR. PREZ
If you're like me, you were up late Tuesday night following the presidential election. And contrary to a lot of the polls and media predictions, Donald Trump is indeed going to be the 45th President of the United States. He has won the presidential race.
As a Millennial investor, you've got your own "race" to win: the investing race. Do you know what kind of race it is? Do you know how to train for it? Do you know how to avoid the distractions as you train?
As I sat in my Anaheim hotel room listening to CNN's talking heads provide ongoing updates, I was surprised (but not so surprised) to see them periodically providing news about something that was...NOT the election. Which was annoying.
So what was it that CNN kept referencing every hour? If you were following along, you might remember: market updates.
"As we watch Trump take the lead, we can see Wall Street panicking because of the fear of changes in trade policy that a Trump presidency might bring."
"We continue to see the global markets taking a dive as the gap widens in many of these swing states."
"Blah blah stock market blah blah blah."
You know what I had to say to all the market updates during election night? *Yawn*. That's it. Well, actually, I was thinking, "GET BACK TO THE ELECTION!" But mostly, *yawn*.
Why? Because of this: what the markets are doing on one day or one week or one month doesn't have anything to do with my investment choices in a diversified portfolio focused on the long-term. Even with all this gloom-and-doom talk about how others aren't going to invest because this upcoming presidential term is going to cause a four-year "market slump", it doesn't change what I'm going to do. Why should I change my investments, when I invest, or how much I'm investing based on what others are doing?
INVEST BASED ON YOUR GOALS, NOT ON SOMEONE ELSE'S ACTIONS
Maybe what I'm saying is new to you. Don't blame yourself if you know you've acted on the market noise before. Really, with the way our media talks about things, it's not crazy for any self-taught investor to think that what the media says matters. After all, aren't these super smart economists and financial analysts who know what the heck they're talking about?
Maybe they are, but their goals and the goals of the companies they work for are very different yours. Their goals might be to make a very large profit, perhaps leveraged, in a short period of time. They also execute trades in millions of dollars at a time, which means their decisions can actually have a noticeable effect on the market, unlike your little drop-in-the-ocean amount of shares in a few mutual funds.
By nature, Wall Street has an obsessive fanaticism with what stock prices are doing from day to day, and even from minute to minute. This is because their goals to make a quick profit necessitate that kind of attitude. Plus, they have the resources know-how to try to play that game. But you're an individual person with limited knowledge and manpower for investment research and whose personal goal is, most likely, to build wealth over the long-term. Different goal = different strategy.
For you, trying to trade and invest like Wall Street is a lot like feeling pressure to train like the sprinter gearing up for a 100m race. The sprinter's at the gym powerlifting next to you, when you're jogging on the treadmill trying to prepare for a marathon. You have no reason to feel pressure to work out like the sprinter does; you're not even training for the same kind of race, so it's not relevant to you. The sprinter's preparing for a few seconds of all-out speed. You're preparing for 26.2 miles of paced, long-distance running.
I know that sounds kinda simple, and maybe even silly. And yet, that's exactly how the average individual investor goes about managing their portfolio. They get sucked into everything the media says and every movement the market makes in the short-term.
And unfortunately, they actually buy and sell certain parts of their portfolio quite often in reaction to the frenzy. For example, stocks in Europe might be falling fast, and they panic. even though stocks in Europe only make up a portion of their total portfolio, they've properly diversified their investments, and they don't even need their money soon.
This concept is what separates the people who invest like amateurs versus those who invest like professionals. The former are reactive to others' actions in a random, in-the-moment fashion. The latter are proactive and respond based on their goals and plan - which may include triggered responses to certain events, but it is always premeditated and executed in a consistent, disciplined manner.
WHY DO WE WATCH OTHERS?
Then why oh why do we feel pressure to act based on what others do? I think it comes down to a few things:
- Herd Mentality - we're heavily influenced by social validation and feel comfortable doing what everyone else is, even when it's not what's best for us, because even if we suffer a loss at least everyone else did with us.
- Self-Consciousness from Lack of Knowledge - to be honest, when you don't know what you're doing, you watch what everyone else does. It's like being self-conscious at your first experience with anything - you try to blend in by following everyone else. If you're doing this with investing, it's a good sign that you're probably not suited to manage or choose your own investments.
- Greed and Fear of Loss - it sounds ugly, but this is a well-researched point. Unrestrained, we can tend to have a greed factor that can emotionally override our logical decision-making abilities. Perhaps you've heard the research that says we "feel" losses twice as powerfully as we relish gains. So when stock prices are fluctuating rapidly, we feel like we have to act in order to avoid loss, and we end up watching what others are doing and follow suit.
INVEST BASED ON YOUR INVESTMENT POLICY STATEMENT (IPS)
By now, I've established that your investment plan and asset allocation should be based on your goals. Your goals, not someone else's. You only need to care about this question:
Is my investment plan designed to help me reach my financial goals?
For me, I've carefully chosen a selection of investments that will work in cohesion to provide me a portfolio return adequate for me, for a reasonable risk, and for my time horizon. It's a globally-diversified, passive approach, where I have chosen to automatically invest in fixed intervals, and not "time the market" with my deposits. I am also expecting recessions to happen and fluctuations in my portfolio's value to be fairly common, and those expectations are all factored into my plan.
This plan, or set of rules or parameters that will dictate my investment choices, can be referred to as my Investment Policy Statement (IPS). My IPS should only be changed if my actual goals change, or if I get really off-track to reaching my goals. I won't deviate from it just because a guy with a bad hairdo got elected and spurred a flurry of activity among other people.
There are no guarantees of future returns, but I have good reason to believe that my portfolio and investing strategy - which if founded upon reasonable expectations and academic research - has a good chance of helping me achieve my goals. So I'm going to stick wit' it.
WIN YOUR INVESTING RACE
The 2016 presidential race is over, but your investing race is not. If you found yourself thinking about your investments during this election, take a step back and ask yourself if you really understand the point behind why you're investing. Form an investment policy statement and stick to it.
If this election has been personally stressful for you, don't let it also add stress to your investment decisions. Don't worry about whether or not to invest during this short market drop after election day. Don't pressure yourself to invest more, buying extra shares while things are low. Just follow whatever you said you'd do in your Investment Policy Statement. If you find that hard to do, or if you don't have an IPS yet, perhaps the assistance of an investment advisor is in order.
Without a clear investment plan, you're probably going to suffer a lot of emotional "what should I do now?!" moments over the years. Just remember: don't let what others are doing "trump" your commitment to your investment policy statement.