“The primary business of the American people is business.” That statement by Calvin Coolidge has been shortened and simplified since this Republican president delivered it to an assembly of newspaper editors A century ago.
But the idea that America’s business is business remarkable display at President Trump’s inauguration. This is perhaps the main reason for the increased optimism in the stock and bond markets.
Many concerned readers wrote in – asking how, in broad terms, they should deploy their money during the second Trump presidency. This is both an urgent problem and an eternal dilemma, which, in investment jargon, is labeled asset allocation. How do you divide your money to get the most reward for the least risk? The new administration presents investors with outsized rewards and monumental risks from the start.
Certainly, Trump’s inauguration conveys conflicting messages and meanings. In its long formal inauguration speech in the Capitol Rotunda And then in a stream of well-published remarks as well as a flurry of executive orders, Mr. Trump touched on many of his favorite and most controversial topics.
They include declarations of two states of emergency, allowing 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; Place an American flag on Mars; And, generally, achieve America’s “manifest destiny.”
Depending on your personal politics, these initiatives may seem deeply troubling – or refreshingly disruptive. But in Mr. Trump’s meandering statements, one thread was clear and consistent.
Giving pride of place at its inauguration to a coterie of tech-rich executives – Tesla’s Elon Musk, Amazon’s Jeff Bezos, Meta’s Mark Zuckerberg, Google’s Sundar Pichai and Apple’s Tim Cook stood in in front Cabinet nominees like Robert F. Kennedy Jr. – The Trump team has emphasized its relentless commitment to the pursuit of profit. Big Business has an inside track in the second Trump presidency, and those with a stake in these companies have reason to rejoice.
I’m not jumping on any bandwagon. Based primarily on the fact that the United States has survived for almost 250 years and its economy has overcome countless setbacks and managed to thrive, I think it still makes sense for individual investors to rely on the classic principles that have worked for decades.
I’ve sketched the contours of what academic funding tells us to invest in for many years, but at a difficult time like this, it’s worth a simple review. So here are some basics of what I think everyone needs to know about asset allocation.
Diversify, don’t play
Great fortunes have already been made since Trump’s victory. One beneficiary is Mr. Trump’s new acolyte and well-heeled supporter, Mr. Musk, whose Tesla shares rose more than 60% from Election Day to Friday. Another is the Trump family itself, whose new cryptocurrency has quickly become one of the most precious Speculative digital ventures.
If you broke out on these bonanzas and reaped some wonderful winnings, good for you. In a small way, I guess I did too. I do not own cryptocurrency directly, nor do I own shares of any individual company’s stocks or bonds, but I do have holdings through low-cost global stocks and bond index funds. Even cryptocurrency is included in my holdings, indirectly, through companies like Microstrategy and Coinbase.
But I don’t make short-term bets of any kind, and as an investor I don’t try to figure out what will go up or down over the next four years. Instead, I’ve placed permanent bets on overall markets through index funds, which don’t require me to pick individual stocks or bonds or closely monitor their performance. This is the approach I would take under any president.
Most academic studies have shown that simply staying in the markets for the long term has been an excellent approach – one that few professional traders beat.
Find a balance
There are always risks in investing. But in the sense used by Benjamin Grahamthe Columbia finance professor who was Warren Buffett’s mentor, investing is a long-term and serious business. It is as different from speculation as price value. When investing, you don’t make quick bets. Instead, you expect that over many years, the growing, underlying value of your holdings will eventually be reflected in their fleeting market prices.
This underlying value is supposed to protect you against losses, although over short periods of time, when markets plunge, even strong companies drop sharply in price. Squaring that circle – getting the greatest reward for the least amount of risk you are able to bear – is what diversified asset allocation aims to accomplish.
Professor Graham and his student, Mr. Buffett, evaluated individual securities with great care and with a laborious and well-researched method that ultimately depended on sound judgment. Most people don’t have the talent, background, or time for this, which is why these two prominent investors recommend low-cost index funds for the vast majority of us.
People with short time horizons – say, older retirees or a parent who will be setting aside money that will be needed for a child’s education in the coming years – are particularly vulnerable to the consequences of serious losses.
For the true opposite risk, actions may be unwise. Safer, fixed-income securities may be well-suited for people who won’t have time to recover from major setbacks.
Short-term Treasury bills – held as individual securities, through money market funds or short-term bond funds – also will not generate high returns but will not inflict significant losses. Sometimes protecting your money is much more important than getting a great return.
That said, stocks have outperformed bonds over long periods of time, and for those with the time and ability to ride out losses, large stock holdings in global market index funds may be the investment of choice. If you’re just starting your career, you might want to put all the money you’re stashing away for retirement into broad stock funds, funneling some into bonds until later, when your career trajectory is shorter.
These alternatives—a risk-averse person holding only short-term Treasuries and a risk-taker with plenty of 100% time in storage—represent two extremes of asset allocation. For those looking for solid returns with a degree of stability, something in between may be better.
How much in stock and how much in bonds? There is No scientific solution to this question. The conventional answer is 60% stocks and 40% bonds for a typical investor – but none of us are entirely typical, and what we think we can handle may differ from what we can actually accept in a great market decline.
William J. Bernstein, author of “The four pillars of investment” I was reminded of this in a phone conversation. “Estimating your risk tolerance in advance is like experiencing an accident in a simulator. You’re not going to respond the same way on a real plane. » Some people may be able to shrug their shoulders over a big loss, knowing that the stock market has generally recovered within a few years and moved to greater heights. Others may realize that they were more aggressive with their investments than they had understood. “If you find this happening, by all means, change your allowance to one that lets you sleep at night,” he said.
History shows that under most presidents — including Mr. Trump, in his first term — the U.S. stock market has risen. This time might be different, but the biggest risk may be staying away and missing out on economic growth and corporate profits.
Your political views don’t need to determine your financial approach. Instead, find an all-weather allowance you can live with and try to stick to it.