Trader Jonathan Mueller works on the floor of the New York Stock Exchange, on Nov. 4.Richard Drew/The Associated Press
Whatever happens in the U.S. election Tuesday, do not make any important financial decisions in the immediate aftermath. Tense times distort our sense of reality in a financial sense. We look for ways to mitigate uncertainty and to protect our assets.
What is the smart money doing? The smart money does nothing because it anticipates disruption in advance and plans accordingly.
A lot of pre-election chatter suggests otherwise. There has been a lot of talk in the financial world about who will be better for the economy and the fight against inflation, Democrat Kamala Harris or Republican Donald Trump. Another topic of discussion is how stocks and bonds will perform and which individual stocks and sectors might excel or fall behind.
This kind of commentary is conjecture presented to create an aura of expertise that helps sell analyses, investment products or portfolio management services. Financial commentators know you’re worried, so they are eager to be seen as having answers to avoid the worst and make money out of mayhem.
Whatever happens in the U.S. election, smart calls will make money for some people in the days and weeks that follow. You’ll hear about some of them, but it’s unlikely you’ll read about all the wrong decisions that generated activity rather than profits. An often overlooked reality of investing is that much human activity in this area generates losses, not gains.
The answer is to limit your activity to setting up your finances and investments in a way that carries you through all eventualities. It’s easy – just a few steps are needed.
Start by asking yourself: What can I do with my finances to ease my mind in case of stress caused by personal or world events? An obvious answer is to have an emergency fund of cash to carry you through a job loss or a decline in income. Keep the money in a high interest savings account that can be used for purchases via a debit or prepaid credit card. Having enough to cover a few months of household expenses is ideal, but even a few hundred dollars could make a difference.
Keep a secondary emergency fund at home in the form of a hundred dollars or more in bills and coins. In a blackout that short-circuits electronic banking, this money could help you buy what you need.
Lots of people like gold as a hedge against uncertainty, and the rise of gold prices this year certainly supports this idea. But gold is an unpredictable asset that requires safe storage if you buy the actual metal and pays no dividends or interest. Investor infatuation with gold is going to fade at some point, and prices will fall.
Apply the same thinking to cryptocurrency. Bitcoin prices jumped about 15 per cent in the past month, and the world’s biggest bitcoin fund, the U.S.-listed iShares Bitcoin Trust ETF (IBIT-Q), added an impressive US$872 million in net new money in a single day last week. Investors are betting on the potential for a win Tuesday by crypto-friendly Republicans.
If you believe in gold or crypto, make a commitment by adding it to your investments in a controlled way. A weighting of 3 to 5 per cent of your overall portfolio seems a reasonable way to contain risk while keeping open the potential to benefit from gains.
The vast majority of your investments should be divided between bonds and stocks from Canada, the United States and the rest of the world. Lock onto the right mix by considering your age and your willingness to accept near-term stock market crashes in pursuit of higher returns in the long term.
Change your mix as you age or when your situation changes, not when you’re worried about world events. A classic example of self-inflicted financial damage is selling investments and going to cash in a down market. If you’re fortunate enough to sell in a timely way, your next challenge is to not miss out on the next market upturn.
One move you should definitely make if markets fall hard as a result of global events is to buy stocks. Buying when stocks are getting hammered is the ultimate smart money move, as long as you have the patience to wait years for validation.
Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.