Tariffs being implemented by global governments, including allies, across the world have caused a bit of volatility in global markets. The latest media frenzy is over comments from numerous large company CEOs that the tariffs could cause these companies to lay off workers domestically. Trade tariffs increase costs for corporations, hurting profit margins and increasing costs for consumers. This can cause consumer demand to decline, which can lead to a slowdown in economic activity. There will be many more news stories about the trade negotiations around the globe. You may wonder how this news affects you.
The effects of these tariffs are important and have real impacts on the global economy, and, therefore, the financial markets. However, it is more important to maintain a long-term focus and understand that appropriate long-term portfolio management should already take these events into consideration well before they occur.
What do we do for our clients in these environments? It all starts at the beginning of our relationship. When we construct portfolios, we construct them with the knowledge that there will be economic expansions and contractions, and there will be bull markets and bear markets. Our methodology seeks to constrain the potential volatility within a range as much as possible. We then tie the expected long- term return and volatility of the portfolio to your life goals through the financial planning process in order to understand your probability of success.
It is important to control what you can control. As human beings, our psychology drives us to want to “take action” and react to stimuli that triggers our “fight or flight” response. While this response can save a life in the physical world, in the financial world it can lead to disaster. This is why it is important to have a methodology or process in place that helps mitigate emotional responses in portfolio management and to know what actions you will take before any event occurs.
Our portfolio management process does exactly that. We build portfolios that are resilient and appropriate for your unique situation. This does not completely protect from “losses” over a given time period, and no methodology exists that can. So when certain investments fare poorly in a given economic environment does that mean we automatically sell that investment? Absolutely not! Markets cannot be timed, and the uncertainty of markets is precisely why investors receive a return for investing in them.
So what do you do? We have a rebalancing process that takes emotion and guesswork out of the way. As certain investments rise in value and others fall in value, our rebalancing process causes buy and sell “triggers” to be pulled; naturally selling the investments that have become “expensive” and buying investments that have become “cheap”. Exhaustive research has shown that over time this process yields a far more positive outcome for investors than trying to time the markets. Often “market timers” exit at or near market lows and fail to re-invest until markets are at or near highs, which leads to a very poor outcome.
We do pay attention to indicators in the markets. There are times where we may increase our cash or fixed income positions based on market valuations and other data inputs. This is not an attempt to time markets whatsoever, rather a recognition that when markets become “expensive” there is greater risk (like 2007). Conversely, when markets become “cheap” there is greater opportunity for above-average return (like 2009). With that said, markets can remain “cheap” or “expensive” for very long periods of time, therefore the indicators cannot be used to time the markets and it is very much in an investor’s best interest to remain invested, focused on the long-term, and adhere to the pre-set portfolio management methodology.
So while the news can sound scary at times, it is best for investors to ignore the negativity and focus on what they can control….. their savings rates, mitigating high interest and variable debt, controlling spending, and, most importantly, controlling their emotional response and focusing on activities they enjoy in order to have a happy, fulfilling life.
A more in-depth look at our Investment Committee’s thoughts will be included in our quarterly Market and Economic commentary due out next week. Until then, if you have any questions or concerns we are only a phone call or email away.
The LTWM Team wishes you a happy and safe Independence Day holiday!