17 Nov The market under Trump – what next?
This blog comes courtesy of our Financial Adviser Chris Kelly, who is the man to ask about all things markets and investing. This month he gives us his thoughts on how the Trump election result might affect markets going forward and how you can prepare for potential changes.
The recent US election result showed just how difficult it can be to trade in share markets. Not only was the ultimate victor a surprise but the share market reaction the day after was possibly a bigger surprise because the experts had predicted that a Trump victory would be bad for the US share market.
Since the Australian market was open during the vote counting the swings in the state election vote count resulted in a wild ride for investors during trading on the 9th November. At one point, as the Florida and North Carolina count initially favoured Clinton, it was a case of ‘risk on’ for the market which rose 1%. However, within an hour of reaching its summit, the market fell off and a little over an hour later was almost 5% below the peak. At the end of the day, the market was down about 2% from its starting position.
By the close of the market the next day, Thursday 10th November, the market had recovered all of the losses and some. The Trump election victory had actually been a positive for the Australian share market.
So what does it mean for us as investors (rather than traders)?
- Firstly, it’s important to realise that market timing is very difficult to get right. The market timer needs to get two predictions correct – picking the right time to enter the market and then picking when the party is over, so that they sell and moving back to cash before the market falls.
- The second lesson is one of controlling our emotions when it comes to market movements. Anyone who watched the market falling 5% in about an hour on Wednesday or has watched market falls in the past knows that the overriding urge is to stop the losses and sell out. However, by the time the market has fallen to a point where you want to sell, it’s generally already too late to do so, you’ve already lost.
- The third is that markets will rise and fall in the short term based on variety of investor and analyst ‘expectations’. Often this is referred to as ‘market noise’ that interferes with the values of companies. Over the medium and longer the term however, ‘the market’ will provide capital to the companies that are producing growing returns for shareholders.
Many market research companies have conducted comparisons of the average investor’s return against the return produced by the market (as an index). The results show that the average investor underperforms the index, often by a substantial margin.
Such a underperformance could be a result of trying to achieve market timing whilst managing its fiercest opponent, emotion. This is depicted in the chart below:
So as an investor, it’s important to do the following:
Hold a diversified portfolio so that the different returns from the different asset classes you hold all complement each other.
Invest for the long term and stick to your strategy and the strategic allocation you hold across the different asset classes. This means that following strong returns from certain asset classes you will be overweight these and you need to review and sell down, taking profits from the assets that have outperformed.
Invest as early as possible and continuously build your savings as the longer you are invested the greater your potential returns.
If you have questions or would like to discuss your investment portfolio please contact us and Chris can help you make the most of the coming market.