Predicting the outcome of political situations is even more fraught with danger than attempting to predict financial markets, but the drop in stocks over the last few days has been about people attempting to do just that.
The health care bill supported by the Republican Party’s Congressional leaders and by President Trump has looked in danger, raising questions about their ability to focus on and pass policies that the market has been eagerly anticipating, such as tax reform and infrastructure spending.
Combine that with news that some of the President’s campaign team are under investigation by the FBI for possible collusion with Russia and there is enough uncertainty around on the political front to cause investors some serious worry.
In reality, the most likely outcome is that both of these turn out to be non-events. Last minute compromises to get bills passed are hardly a rarity in Congress, and even if that is not the result of today’s shenanigans, it probably won’t impact some of the more economically oriented policy proposals.
Nothing unites Republicans like tax cuts, so moving quickly onto that subject to reunify the Party after a contentious fight would make perfect sense. The potential for long term impact has been played up to such an extent though that even some long term investors are wondering whether they should react if the health care bill fails. They should not, and not just because the worst case scenario may not unfold.
During my time as a financial advisor I learned certain things about my clients that I believe apply to the investing population in general. Many, for example, exaggerated the market’s mood in their own minds. When a normal sized correction came they would call, asking if now was the time to sell out of everything, and the same people would become hugely motivated buyers after a rapid rally.
They were, it seemed, programmed to buy high and sell low. Of course, as most of us have often heard, doing the opposite, buying low and selling is one of the keys to long term success. Even more important in many ways, though, is simply staying invested. The chart below for the last 25 years performance of the S&P 500 illustrates the importance of that.
There have been some serious ups and downs but ignoring them has been the best long-term policy. Ideally, you would have bought more stocks on the big dips in 2001/2 and 2008/9, and there are a couple of things that you can do to make that happen. The first is what investment professionals refer to as “dollar cost averaging.” (Actually I believe that term was invented to make something simple appear mysterious, as all it refers to is investing the same amount each month over time, something that most of us who are saving for long term goals do anyway).
When you stop and think about it logically, investing the same dollar amount into a portfolio of mutual funds or ETFs every month should cause you to welcome rather than fear the market’s periodic corrections and even collapses. When stocks are falling you are getting more shares in that fund for the same amount of money and, as the above chart shows, they will recover and increase in value at some point.
There is also something else that you can do to program the benefits of buying low and selling high into your long term investments: regular rebalancing. When you set up an investment account you would normally decide on what percentage of your money to allocate to which type of funds.
You may, for example, put 70% of your money in stocks with 20% in bonds and 10% in real estate and commodities. There will also be subdivisions within those allocations, such as dividing your stock investments between small and large companies and maybe domestic and international. Rebalancing involves moving things around within your account on a regular basis to restore those original percentages.
Inevitably, over any given period, some of your investments will perform better than others. Stocks may do better than bonds, for example, and within that U.S. stocks may do even better than international. Those different performances will distort the percentage of your account in monetary terms that is in each product, and rebalancing involves selling the best performing sectors to buy the worst performing in order to restore those original ratios. By doing that, of course, you are selling high and buying low, but without making the conscious, and often counterintuitive, decision to do so.
The most important thing here is to understand that for long term investors the fate of the healthcare bill later today and even the results of the investigation of the President’s associates should not be influencing your investing decisions. Not that long ago the advice given to those investing for the long term was simply “buy and hold” or “set it and forget it."
Setting up your accounts to cancel your natural tendency to sell low and buy high, though, is now easy to do. You can program regular payments to be transferred into your investing account and usually can also set your account to rebalance every year. Doing both of those things is a lot easier than trying to second guess politicians, and will enhance long term returns.