Investors in domestic automakers, Big Pharma and U.S. defense contractors have seen their investments swoon in recent weeks at words of criticism from President Donald Trump, but they also witnessed the Dow Jones industrial average soaring past 20,000 as the new president vowed to roll back regulations on big banks.
This volatility has some Main Street investors jumping out of the stock market amid a bull run – a move that money managers warn could sabotage long-term returns. They advise investors to put a fixed amount of money in stocks on a regular basis. This tactic, called dollar-cost averaging, will buy more securities when prices drop and less when they go up. Averaging out the purchases allows investors to weather market ups and downs.
“I show one chart to prospective clients when they come in,” said Kelly Brothers, a partner at Genovese Burford & Brothers. “It shows asset classes over the last 20 years and how they’ve done. The S&P 500, which is the broadest measure of the U.S. stock market, if you take a price appreciation plus the dividend paid by the S&P 500, its annualized return has been just about 10 percent per year.”
“Bonds, on the other hand,” he said, “returned just under 6 percent for a basket of corporates and governments and everything else.”
If you had a portfolio with 50 percent in stocks and the other half in bonds, Brothers said, you theoretically could have gotten 8 percent over the 20 years. Subtract a percentage point for fees, he said, and you would still have a 7 percent return.
Go to the end of the chart that Brothers shares with clients, and it shows the actual return that the average investor has received over the last 20 years. The number is a dumbfounding 2.5 percent.
Why the huge difference? All too often, investors buy after stock prices have risen because they feel confident in the direction of the market and sell after prices decline because they are fearful.
The new president has signed several executive orders in a relatively short period of time. In news conferences, he has made pronouncements about industries to signal sectors he is targeting for reform: The pharmaceutical industry, he said, is getting away with murder by overcharging for drugs. He tweeted that General Motors must produce its Chevy Cruze in the United States rather than Mexico or it will face a big border tax when cars are shipped north.
“If you follow every tweet,” said Nathan Torinus, COO at Genovese Burford & Brothers, “you can get tied up in knots very quickly, and start chasing what’s hot and what’s going to be hot, and getting out of what’s not going to be hot.”
Economics professor Kristin Van Gaasbeck said she explains to her Sacramento State students that investors don’t like uncertainty: “Uncertainty makes it harder for us to make well-informed decisions in our best interest. That isn’t necessarily a policy objective of the president or Congress, but I know on the monetary policy side, when we’re talking about the Federal Reserve, they are very aware of this. ”
The Fed’s governing board will release minutes of meetings with detailed descriptions of the weight they are placing on economic indicators, why they’re watching them and what scenarios will play out, depending upon what they observe, Van Gaasbeck said. Past presidents have signaled potential policy changes by floating trial balloons through press briefings or Cabinet officials. Then they assess feedback from business leaders or voters before announcing an official position.
“If the executive orders keep coming at the ... same frequency we’ve seen in a relatively short period of time, it’s hard to know if the market will tune out that signal because it’s such a noisy signal,” Van Gaasbeck said. “That’s one possibility. Now, if the policies actually get implemented quickly ... then the market will say, ‘OK, well, now we really do have to listen.’ ”
Marc Doss, the regional chief investment officer for Wells Fargo Private Bank, told me he recently met with colleagues in New York, where the market response to presidential tweets and executive orders was a hot topic. Some clients, he said, have wanted to sell their stock as a result. That’s contrary to everything his team would advise because most people have long-term investment horizons.
“The economic fundamentals are sound,” he said, “and if we get some of the positive things out of this administration like tax reform and some regulatory reform, we think we could actually see some acceleration this year. In the meantime, we have all the rhetoric and tweets that are worrying some individual investors.”
So what’s the bottom line advice from experts?
Keep your eye on your long-term goals, and don’t let one tweet upend your portfolio.