How to Keep Headlines From Driving Your Portfolio Decisions

Big, unexpected events commonly trigger strong emotional reactions. The wiring in our brains triggers us to quickly respond to new stimuli. The initial course of action is often the wrong one when we’re not in physical danger. This is particularly the case when it comes to managing our portfolios.

Long-term investing success comes in large part from simply sticking to a plan no matter what is going on around you. This is far easier said than done when big events occur. Our desire to do something conflicts directly with what is best for achieving our long-term financial goals.

So, I’m not going to tell you those of you feeling a strong emotional response to yesterday’s election to not do anything. Rather, I want you to act. Take a deep breath. Turn off the television and go for a walk. Read a good book that has nothing to do with investing, such as “Proof: The Science of Booze” (Houghton Mifflin Harcourt, 2014). Do something that does not involve thinking about politics or the market. After the past several months of campaigning, the break will do you some good.

After you have cooled down emotionally, come back and reassess your financial strategy and situation. Start with your short-term needs. Money needed to cover anticipated expenses for the next six months to two years should be in cash. If you are a retiree, consider putting the equivalent of four years of expenses into cash and short-term savings vehicles (money market funds, CDs, Treasury bills, etc.) Yes, interest rates stink right now, but it’s better to earn a low amount of interest than to risk losing money you will need in the short term.

Then start thinking long-term. What are your needs? What are your goals?

If you are retired, ensure that you have a strategy for funding your living expenses beyond the next two to four years. There are disagreements on the best way to do this, but it is important to determine the combination of annuities, bond ladders and stocks/stock funds that makes the best sense for you. Annuities guarantee income; stocks grow wealth. Think about your ability to not panic, your desire to bequest assets and your willingness to stick to a long-term withdrawal strategy.

If you are working, keep saving. If you are working and are now nervous, save more if you can. (It’s also a good idea to save more if you are now feeling optimistic.) While you can’t control the economy or what happens in Washington, to the extent that your spending is discretionary, you can control how much you save.

You can also control your ability to stay invested and maintain a consistent allocation to equities. Though it’s difficult to think beyond the short term when headlines are front and center, the odds favor those who stick with stocks. Large-cap and small-cap stocks have gained during 74 out of the 86 rolling five-year periods that have occurred since 1926—a win rate of 86%, according to the 2016 SBBI Yearbook (Duff & Phelps, 2016). Extend the time frame to rolling 10-year periods and the win rate is 77 out of 81 (95%) for large-cap stocks and 79 out of 81 for small-cap (98%). These are very favorable odds and they encompass both the previous good and bad periods the U.S. has experienced since 1926.

If none of this helps you resist the urge to alter your portfolio in reaction to yesterday’s election—or the overall macro/market environment—then you need to reassess your strategy. The optimal investing strategy is always the one you can stick to no matter what the market is doing and what the headlines are. If you believe your optimal strategy is one that limits risk, realize that your savings rate will have to be significantly higher than it would be if you were willing to accept a higher level of market and headline risk.

If, on the other hand, the outcome of yesterday’s election has you feeling optimistic, the same guidelines still apply. Base your allocation decisions on your long-term goals, not the day’s headlines. Just as negative feelings can cause investors to unnecessarily reduce their equity allocations, positive emotions can cause investors to unnecessarily increase their exposure to stocks. Your goal should be to maintain an allocation that’s appropriate for achieving your financial goals, regardless of what the headlines are.