The U.S. stock market is booming. Since Donald J. Trump declared that he had won the presidency for the second time, traders have been happily driving share prices up.
Stocks have reached new highs, the dollar is strengthening and bond yields have moved up in the expectation that Mr. Trump’s victory will mean not only accelerated economic growth, but, quite possibly, another surge of inflation.
Making cool financial calculations about the implications of the Trump triumph, as market traders are doing, may be the last thing on the minds of voters who had hoped that Vice President Kamala Harris would win the presidency and that Mr. Trump, a twice-impeached felon, would never become president again. If you are afraid that democracy is in imminent danger, how your investments are performing may seem the least of your worries.
Yet regardless of your political orientation, you need a financial plan that you can rely on even in times of stress, particularly for investing.
Will the markets rise or fall further, now that a second Trump administration is in our future? Tax cuts are likely, but Mr. Trump has also repeatedly vowed that he will impose tariffs on China and on many other countries as well, measures that could lead to increased inflation, reduced international trade and a drag on the global economy. And while Mr. Trump has promised to crack down on illegal immigration and to initiate mass deportations, the effects of such policies on the U.S. labor market, and on industries like construction and agriculture that depend on immigrants, can’t be reliably estimated.
It’s unlikely that the markets have fully absorbed the implications of all the policies Mr. Trump and his allies espoused over the course of an unruly political campaign. For one thing, political control of the House of Representatives is unsettled, so it’s not clear whether Mr. Trump can enact his most ambitious policies.
For another, the Federal Reserve, which cut short-term interest rates by a quarter point on Thursday, can’t be sure, under the current circumstances, what effect the next administration’s still-undetermined policies will have on the economy. What’s more, Mr. Trump has already indicated that he has little regard for the traditional independence of the central bank. Fed policy over the next year must be viewed as even less settled than usual.
No one can reliably predict the future. Worrying about it is entirely natural, and it’s possible that a second Trump presidency will represent a breach with history so great that what’s come before can no longer serve as a reliable guide to investing.
Yet I doubt it. There is considerable evidence that you will be better off putting these worries aside, as far as your finances go, while embracing a slow and steady approach.
Market history shows that it hasn’t really mattered much whether long-term investors in the United States moved into the market at “the right time,” whether defined by politics, disasters, market booms, busts or anything else.
Instead, the important thing was to invest in the overall stock market in the first place, and to stick with it. Until proven otherwise, I think this makes sense today.
Slow and Steady
The latest trove of information on this subject comes from Jeffrey Yale Rubin, the president of the independent market research firm Birinyi Associates. He shared calculations on investing in the S&P 500 stock index over the last 40 years or so.
The numbers he came up with described the behavior of two imaginary investors. One, utterly hapless, always put her money into the market on the absolutely worst day of each year, when stocks were most expensive. The other had perfect timing and invested only on the day when stocks were cheapest.
They both started at age 22 in 1982, and put $7,000 annually into a tax-sheltered Individual Retirement Account. Over 42 years, that came to a total of $294,000 in contributions each.
In one sense, the results were just what you would expect. The investor with perfect timing did better than the one who always invested on the worst possible day. But what was startling, and heartening, was that they both did extremely well.
The perfect investor would now have about $3.4 million from those modest, $7,000-a-year investments. The bumbling investor would have $2.7 million.
Those are big gains for both, yet in the real world, they would actually have been far greater.
That’s because, for simplicity’s sake, Mr. Rubin computed only the price return of the index, not its total return, including reinvested dividends, which would be vastly higher. (He also didn’t factor in the costs of holding a low-cost mutual fund or exchange-traded fund, which would subtract from the totals.) Using Bloomberg data, I did some calculations from Dec. 31, 1981, through last month that give a sense of the difference.
S&P 500 index, price change, cumulative, 4,556 percent; total return, including the effects of compounded dividends, 13,021 percent.
Vanguard 500 index fund, total return, 12,458 percent.
Compound returns on dividends are remarkably powerful. The two $7,000-a-year investors would both be millionaires by now, several times over. One would be richer than the other, it is true, but even the investor who bungled her timing every single year did one thing right, and that was more than enough: She invested steadily in the stock market, and she stuck with it.
“A lot of people wonder whether they should delay investing for one reason or another, or whether they should start now,” Mr. Rubin said in an interview. If you’re in it for the long run, he said, the answer is clear. “Just start immediately.”
Of course, future U.S. stock returns may not resemble those of the past. It’s possible that the United States has enjoyed a long boom that might be ending. Several prominent investment firms, including Goldman Sachs, Vanguard, Bank of America Global Research and J.P. Morgan Private Bank project that the U.S. stock market has risen so high that its current pricing implies mediocre returns — perhaps as low as 3 percent, annualized — over the next decade. These projections were done before Mr. Trump’s victory, and the post-election surge in prices.
A Basic Plan
I’m not sure what to make of these projections, or of the scores of new ones that will be coming out as we move closer to the second Trump inauguration.
Whatever the consensus view may be, I think it makes sense to diversify globally, and not to rely entirely on U.S. stock market supremacy. At some point, the U.S. market advantage will fade.
Similarly, I think it makes sense to diversify with bonds, although the bond market has not turned in stellar returns or effectively hedged against stocks in recent years. Going back to 1926, historical data shows that investment-grade bonds, especially Treasuries, have protected investor portfolios. If you want to reduce risk over the long haul, bonds can be a balm, even if they haven’t worked well lately.
You can embark on this investing plan with low-cost index funds. Major providers include Vanguard, Fidelity, Schwab, BlackRock and State Street.
There are no guarantees, of course. Markets don’t always rise and they have sometimes taken years to recover from losses. It’s important to plan on hanging in for a long time — at least a decade. If you will need to take money out of the markets soon, I’d stay away from stocks entirely, despite this year’s rally. High-quality bonds are a safer bet.
The new Trump administration promises to bring big changes. Investing won’t be entirely the same in the years ahead. Yet I continue to believe that the words “this time is different” are dangerous for investors. Staying in the markets, despite the craziness of events, has been a dependable route to prosperity for decades. I’m expecting it will continue to be.
The post Even at a Time Like This, Slow and Steady Works in the Stock Market appeared first on New York Times.
