“The main business of the American people is business.” This statement by Calvin Coolidge has been shortened and simplified since the Republican president uttered it to an assembly of newspaper editors a century ago.
But the notion that America’s business is business was on stark display at President Trump’s inauguration. It may be the main reason for the heightened optimism regarding the stock and bond markets.
Many concerned readers have written in — asking how, with broad strokes, they should place their money during Trump’s second presidency. It is both a pressing problem and an eternal quandary, one that, in investing jargon, is labeled asset allocation. How do you allocate your money to get the most reward for the least risk? The new administration is presenting investors with huge rewards and monumental risks right from the start.
Of course, Trump’s inauguration is conveying conflicting messages and meanings. In his lengthy inaugural address in the Capitol Rotunda and subsequent stream of well-publicized remarks as well as a slew of executive orders, Mr. Trump has touched on many of his favorite and most controversial subjects.
They include declarations of two states of emergency, enabling the deployment of the military for mass deportations and strengthening presidential authority to promote fossil fuels. President Trump also promised to impose tariffs on China, Mexico, Canada and Europe; seize the Panama Canal; Buy Greenland from Denmark; Plant an American flag on Mars; And, generally, fulfill America’s “Manifest Destiny.”
Depending on your personal politics, these initiatives may seem deeply troubling — or refreshingly divisive. But in Mr. Trump’s pronouncements, one thread was clear and consistent.
Giving pride of place at his inauguration to a community of wealthy tech executives – Tesla’s Elon Musk, Amazon’s Jeff Bezos, Meta’s Mark Zuckerberg, Google’s Sundar Pichai and Apple’s Tim Cook stood inside BEFORE of cabinet nominees such as Robert F. Kennedy Jr. – Team Trump emphasized its relentless commitment to the pursuit of profit. Big Business has an inside track on Trump’s second presidency, and those with a stake in those businesses have reason to rejoice.
I’m not jumping on any bandwagon. Based largely on the fact that the United States has survived for almost 250 years and that its economy has overcome countless obstacles and managed to prosper, my opinion is that it still makes sense for individual investors to rely on classic principles that have worked for decades.
I’ve been sketching out what academic finance tells us about investing over the years, but in a fraught moment like this, a straightforward summary is worth it. So here are the key elements of what I think everyone should know about dividing assets.
Diversify, don’t gamble
Great fortunes have already been made since Trump’s victory. One beneficiary is Mr. Trump’s new backer and well-heeled backer, Mr. Musk, whose Tesla shares have risen more than 60 percent since Election Day through Thursday. Another is the Trump family itself, whose new cryptocurrency has quickly become one of the most valuable digital speculative ventures in the world.
If you’ve hogged these bonanzas and reaped wonderful returns, good for you. In a small sense, I think I have too. I do not directly own cryptocurrency, or shares of stocks or bonds of any individual company, but I have acquired shares through global stock index funds and low-cost bonds. Even cryptocurrency is included in my holdings, indirectly, through companies like MicroStrategy and Coinbase.
But I’m not making short-term bets of any kind and, as an investor, I’m not trying to figure out what’s going to go up or down over the next four years. Instead, I’ve made permanent bets on the overall markets through index funds, which don’t require me to own individual stocks or bonds or closely monitor their performance. That’s the approach I would take under any president.
Most academic studies have found that simply staying in the markets over the long haul has been an excellent approach – one that few professional traders have beaten.
Finding a balance
There is always risk in investing. But in the sense used by Benjamin Graham, the Columbia Finance professor who was Warren Buffett’s mentor, investing is a serious, long-term endeavor. It is as different from speculation as value is from price. In investing, you’re not making quick bets. Rather, you are expecting that over many years, the increasing, underlying value of your properties will ultimately be reflected in their market prices.
This underlying value is supposed to protect you from loss, albeit for short periods, when markets fall, and even solid businesses fall sharply in price. Squaring that circle — getting the biggest reward for the least amount of risk you can bear — is what diversified asset allocation aims to achieve.
Professor Graham and his student, Mr. Buffett, valued individual securities very carefully and with a painstaking and well-documented method that ultimately depended on sound judgment. Most people don’t have the talent, background, or time for that, which is why both of these prominent investors recommend low-cost index funds for the vast majority of us.
People with short time horizons—say, older retirees or a parent putting away money that will be needed for a child’s education in the coming years—are especially vulnerable to the consequences of serious losses.
For real risk, stocks can be reckless. Safer, fixed-income securities may be suitable for people who won’t have time to recover from major setbacks.
Short-term Treasuries—held as individual securities, through money market funds or short-duration bond funds—won’t generate huge returns, but won’t cause significant losses. Sometimes, protecting your money is much more important than getting a great return.
That said, stocks have outperformed bonds for long periods, and for those with the time and ability to ride out losses, broad holdings of stocks in global market index funds may be the investment of choice. If you’re just starting out in your career, you may want to put all the money you’re holding onto for retirement in broad stock funds, only piling some of it into bonds later, when your career trajectory is shorter.
These alternatives—a risk-averse person holding only short-term treasuries and a long-term risk taker going 100 percent into stocks—present two extremes of asset allocation. For those looking for strong returns along with a degree of stability, something in between may be best.
How much in stock and how much in bonds? There is no scientific solution to this question. The conventional answer is 60 percent stocks and 40 percent bonds for a typical investor—but none of us are completely typical, and what we think we can handle may differ from what we can actually accept in a downturn. large market.
William J. Bernstein, author of The Four Pillars of Investing, reminded me of this in a phone conversation. “Estimating your risk tolerance in advance is like experiencing a crash in a simulator. You won’t respond the same way on a real airplane. ” Some people may be able to cut a big loss, knowing that the stock market has usually recovered in ‌Just a few years and gone to greater heights. Others may realize that they were ‌far‌ ‌more aggressive – with their investments – they had realized. “If you realize this happens, by all means, change your allocation to what allows you to sleep at night,” he said.
History shows that under most presidents – including Mr Trump, in his first term – the US stock market has risen. This time may be different, however the biggest risk may be staying away and missing out on economic growth and corporate profits.
Your political views should not determine your financial approach. Instead, find a versatile allocation you can live with and try to stick to it.