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How Will Trade Tariffs Affect My Investments?

How do you feel about the trade tariffs being announced?  Some people love it; some people hate it; and some people feel like it’s just Trump being Trump.  Regardless of how you feel about them, many investors are concerned about how they will be affected by the tariffs.  What will this mean to their investments in the short and long term?  Is this going to be the beginning of the next major recession?  Let’s take a look at these questions to figure out a wise approach to the situation.

What’s Happened So Far

Basically, trade rhetoric turned to trade rumors which turned to trade threats which turned to trade tariffs which have turned to trade wars.  This type of uncertainty typically makes investors jittery and results in lots of volatility.

While it’s felt like a tumultuous 2018 so far, the economy and markets are actually in pretty good shape.  Most economic indicators are still positive, and the S&P 500 is up 4.4% for the year.  Not that it’s been a smooth ride.  It’s felt more like drinking a bunch of espresso and then taking a ride on a mechanical bull.  So where does this ride end?

Where This is Headed

The only thing we know is that we’re headed towards uncertainty.  James 4:13-15 reminds us that no one knows what will happen tomorrow and that there’s nothing promised about tomorrow.  Solomon teaches us in Ecc 3:1-8 that there is a season for everything and cycles are a part of the world God created.  Part of these seasons and cycles involves recessions and, yes, drops in the value of your investments.

We’ve also been given some insights into these seasons.  Jesus teaches us a lesson from the fig tree:

“Now learn this lesson from the fig tree: As soon as its twigs get tender and its leaves come out, you know that summer is near.” – Matthew 24:32

In other words, while God doesn’t expect us to know the day or year that a market crash is coming, we should prepare ourselves when we see the twigs getting tender.

Two Practical Tips

How do you prepare yourself?  The best thing you can do is to make sure you have enough reserves in cash and bonds.  If you’re an accumulator (pre-retiree), you should keep at least 3-6 months of expenses in cash as an emergency fund.  If you’re already retired, you may want to increase this amount depending on your situation and comfort level with bonds.

Bonds feel like a bit of a wildcard at the moment, as they have finally started to experience some of the losses that folks have been warning about for years.  Of course, the losses bonds will experience are a shadow of what stocks can experience, so by all means don’t give up on bonds.  This is your best asset to own for anticipated withdrawals from your investments for the next 5-8 years.  Over this time frame, they will almost always be better than cash, and will be your best bet to outpace inflation without much of the volatility of stocks.

The other investment strategy to think through is how much to keep in international investments.  As the dollar strengthens, international investments suffer, but the opposite is also true.  Most analysts are forecasting a decline in the value of the dollar if tariffs increase, which would mean a boon for international stocks.  Of course, as often happens, when analysts make predictions like this, the opposite happens.  This is evidenced by a 5% increase in the dollar compared to the euro since tariffs were announced in late January.  The currency movements are also just one component of the investments.  The stocks themselves need to be good purchases and there appear to be a few more headwinds overseas than there is domestically at the moment.

We have actually trimmed international investments some, in particular to emerging markets, to just take some of the currency and political risk off the table.  Until we know exactly what direction these trade wars are heading, it feels better to hedge against these risks than it does to lean into it in an attempt for additional returns.

Your other main option with your investments is market timing, which I’ve only seen go poorly for folks.  Most of us have been feeling like a market drop has been due for about 3-4 years now, and if you had sold out then, you would be kicking yourself pretty hard.  While we can see that at some point a recession will come, we don’t know when and we shouldn’t bet the farm on it.  Rather, just prepare yourself for it so that you will be ready when it comes.  God asks us to be prepared, not to predict the future.

The bottom line here as is normally the case is that no one knows how this will play out or how it will ultimately affect your investments.

Keep Your Emotions in Check

The best advice I can give you is what Paul commands in Philippians 4:6: Do not be anxious about anything!  Much easier said than done, right?  But if you’re feeling anxious about trade wars and recessions, go back to the truth that God is God and you are not, and who by worrying can add a single hour to his life?  If you’re feeling anxious, also think through if you’re putting too much hope and security in your investments rather than the Giver of life.

So keep a level head, turn off the news, and enjoy some time with your loved ones in this break from the heat.  If you want to discuss your situation or your investments, please give us a call.