Since Donald Trump’s unexpected victory in November, the stock market has been on a roll. In the four weeks Trump has been in office, the S&P 500 is up 3.8 percent. The Dow Jones Industrial Average cracked 20,000 for the first time ever on January 25th, just five days after President Trump was sworn in. As of March 1, the index crested 21,000.
Does the milestone of Dow 20,000 mean anything for your portfolio? We investigate.
Why the rally?
There’s been some confusion as to why the stock market has reacted as it has to Trump’s victory. Before the election, many economists were predicting a precipitous drop should Trump be chosen as our next Commander-in-Chief.
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The general consensus, however, is that investors are banking on President Trump keeping some (and only some) of his campaign promises, like rolling back Dodd-Frank (the legislation enacted in the wake of the financial crisis that imposed higher capital requirements on banks, among other things), spending $1 trillion on infrastructure, and lowering taxes. They’re ignoring (for now) his promises to deport undocumented immigrants, back out of trade deals, and impose heavy tariffs on imports-things that would not be so great for the overall economy.
It’s also not uncommon for new presidents to give the stock market a boost. Trump’s is actually not the biggest presidential bump-both Johnson and Kennedy saw bigger jumps in the S&P immediately after taking office, 4.1 percent for Kennedy, and a whopping 6 percent for Johnson.
What should you do if you feel things are too good to be true?
At Money Under 30, we talk a lot about not letting your emotions determine your investment decisions. If you ask us what to do after a market drop (like, say, the one immediately following the Brexit vote), we know exactly what to say: Nothing. Leave your investments as is, and keep making your regular contributions. Panic-selling will only turn temporary losses into permanent ones. When the market drops, stocks are suddenly at a discount, and you should scoop them up.
But what about the opposite? What if you don’t trust the bull market? Should you sell now, while the market is high and ride out what you feel to be an inevitable storm? After all, you might reason, aren’t you just following another well-worn investing edict: Buy low, sell high?
It’s not like there isn’t cause for concern.
While President Trump now tweets about how great the stock market is doing, he was singing a different tune back in August when he was still just a candidate, and when the DJIA was back in 18000 range.Back then, he told CNBC that stocks were overvalued, and that the whole market was “all a big bubble.”
Perhaps you’re worried that the rollback of Dodd-Frank will only set us up for another financial crisis. Or you note that the dysfunction in the White House is likely to make passing comprehensive tax reform or a major infrastructure bill difficult. Or, even worse, that that same dysfunction might lead to a costly war or a recession.
Or, perhaps you think that this bull market which started over 2,000 days ago in 2009, just can’t last. You have company.
So, what should you do?
For guidance, we reached out to Dr. Daniel Crosby, the founder of Nocturne Capital and an authority on behavioral finance. Crosby has a PhD in psychology from Brigham Young University, and is most recently the author of The Laws of Wealth, a book that aims to take the principles of behavior economics and distill them into practical, actionable advice for investors.
Crosby says that if you’re worried the stock market’s rally can’t last, you’re probably right.
“The truest phrase in investing is, without a doubt, ‘This too shall pass.'” according to Crosby. “Our brains tend to want to extrapolate a trend out indefinitely, which means that we overestimate the staying power of bull markets and underestimate how fleeting bear markets can be.”
According to Crosby, research has shown that over time the market almost always returns to average, what’s known as “reversion to the mean.” Losers will eventually become winners, winners will eventually become losers. What goes up must come down, and vice versa.
“It’s fairly safe to say that the next seven years won’t be as good as the last seven years have been, just given the considerable run up we’ve experienced,” Crosby says.
However, while your hunch that Trump’s post-election rally can’t last is probably true, that doesn’t mean you should change your (passive) investing strategy.
Crosby cites a study from Fidelity that set out to examine the behaviors of people with the best performing accounts. What they found may surprise you.
“The most common thread [among the owners of the best-performing accounts] tended to be that they had forgotten about the account altogether,” Crosby says. “Forgetfulness might be the greatest tool at an investor’s disposal.”
A different study by Vanguard arrived at similar conclusions. Vanguard studied the performance of accounts that made no changes versus those who made regular tweaks. The tweakers pretty consistently underperformed those who stayed hands-off.
Despite your sense of dread (or elation), stay the course
While it’s tempting to think you can out-smart the market, or avoid the inevitable drop that’s coming, Crosby says that’s not true.
“At times like this, we are left with two realities that are hard to stomach: One, that forward returns are likely to be paltry and, two, there’s a not a lot we can do about it.”
While there’s much that’s outside our control, Crosby says there’s still ways you can protect yourself and your investments.
“At times like this, our behavior becomes even more paramount. We must be sure that we are not paying any excess fees, that we are working with a professional who can help constrain our bad behavior during bad times, and that we are broadly diversified among and across asset classes.”
Crosby also suggests you should try to sock away a little extra money each month.
“It’s not sexy,” he says, “but it’s the best we’ve got.”
The prospect of a market drop is never fun, but the most important thing you can do is not let that fear and dread lead you to make impulsive decisions that could lead to higher fees or a poorly diversified portfolio. The market may fluctuate, but the best course of action is still to do nothing.