It’s been quite a month, hasn’t it? California has been burning down. New Orleans got more snow than Minneapolis. The QAnon Shaman is back, in hand, the political equivalent of a wink and a “job well done.”
With things feeling as weird as they are, you’d be completely within the spectrum of reasonable reactions anywhere from sobbing at your desk to taking up day drinking. One thing you should not do, however, is change up your retirement investments.
Almost from Day One of this column, I have been a proponent of low cost, passively managed index fund investing. You put your money into this type of fund, keep adding to your capital (preferably with periodic automatic investments), and just leave it alone without regard to the news of the day. If you have been investing this way for any significant time, you have done quite well for yourself.
The stock market has had a bunch of huge dips over the past 10 years — for example, several shocks related to the COVID pandemic. Equities markets recovered from all of these setbacks in relatively short order.
You can probably find plenty of smug Redditors who claim to have gotten out before a big dip, and back in at the bottom, to triumphant effect. A few of them might even be right: with as many people out there trying to time the market as there are, odds are that a handful actually will have done it out of sheer chance.
Still, the vast majority who try to time the market fail (including the vast majority of professional investment managers). For those who fail, though, it is difficult to tell. If you tried to time the market and wound up with, say, a 6% gain, you are very unlikely to commit to the extensive analysis it would take to prove that you would have realized an 8% gain over the same time period had you simply stayed put. Much easier cognitively to just look at the little green upward arrow and feel like a genius.
So far I’ve been talking about staying the course in the stock market through big general sorts of news events. Surely the actual policies of vastly different political administrations could alter the optimal strategy?
Nope, not really. Trump supporters who pulled their investments when Biden was elected because they thought he was going to tank the economy (mostly because Trump said that, a lot) were burned big time. Yet, so were investors who pulled their money out of the market in anticipation of the first Trump term. Overall, stocks did quite a bit better, depending on which index you look at, during the first Trump term than they did under Biden (though neither holds a candle to the stock market’s performance with Obama in the White House).
The fact is that 80% of America’s presidents over the past century had positive stock market returns during their tenures. There probably will be positive returns again during this Trump term, and if not, a recovery when whoever the next president is comes into office.
If you are close to or in retirement, and will really need to start withdrawing from some of your investments in the near future, you should obviously be transitioning to more stable options than broad exposure to the stock market. For everyone else, now is probably not the time to go maverick. When the dips come, you will have plenty of time to make up for them and then some.
More weird things are going to happen over the coming months and years. Some of these things are going to be very bad for certain segments of the population. Look at your 401(k) or IRA investing strategy as a little island of stability upon which to weather the coming storm. It will be really nice to have one less thing to worry about.
Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at [email protected].
