[OPINION: The views expressed by Investopedia columnists are those of the author and do not necessarily reflect the views of the website.]
 

It seems the markets and investors in general have been lulled into a sense of sameness. We've been hearing about the possibility of recession, economic stimulus, higher interest rates, etc. It's been a broken record repeatedly telling us what we already know and warning us about changes we know deep down are coming. The Fed has been saying for more than a year that it will raise rates. Then, it keeps deciding not to. At this point, we've stopped listening because we’ve gotten used to a zero-interest-rate world and a stock market on steroids.

Love him or hate him – and for better or for worse – Donald Trump is likely to shake things up (see How Will Trump Shape America's Economy? and The Trump Effect: Negative-Yielding Debt Plummets). This isn’t the time to panic or be too complacent. This is the perfect time to reevaluate your investment strategy and take steps to ensure that you don't have a sudden, knee-jerk reaction to economic events that could cost you a sizable chunk of your retirement portfolio. 

Three Ways to Prepare for a Trump Economy

While we can't predict exactly what is coming (we can make some educated guesses) – or when – we can plan for the unexpected. Think through what you'll do if that sudden big stock market hiccup or interest rate spike shows up and factor your planning into your overall strategy for the next year and beyond.

The three moves below will help you keep your finances on track whatever happens.

#1: Don’t make dramatic changes to a well-diversified portfolio, but do have a plan.

The most fundamental mistake many investors make is not making any specific financial plan for their future. Sit down with a fee-only financial advisor who offers fiduciary-level advice. Get some real numbers on how much money you have now and how much you will need when you retire. Run through some "what if" scenarios that identify what risk level would make you truly uncomfortable.  Then, plot a realistic path toward meeting that goal. Think seriously about how involved you want to be in managing your money and how much help you want. Talk through the what-ifs for scenarios like a rate hike or stock market tumble.

In fact, you may already have a solid investment plan in place, and in the wake of the election, it may simply need some tweaking. Think tactical adjustments versus a major overhaul. A message taught to young people these days is the need to be true to themselves, and the same is true in terms of your investments. There's something to be said for staying the course rather than jumping ship every time a wave crashes in. Other steps you can take are to review your estate plans, consider refinancing your mortgage and keep adding to your tax-advantaged retirement accounts if you're not maxed out yet.

#2: Don’t add extra risk believing you can anticipate the changes.

It can be very tempting to abandon your strategy, taking on much more risk than you're comfortable with because you feel that you know how to take advantage of risky financial circumstances to grow wealth faster. It seems we're born with the "grass is greener" mentality in some ways, and this particularly kicks in whenever there is a sudden craze.

For example, we know President-Elect Trump has a history of borrowing heavily, we’ve all heard him talk about his plans to invest in America’s infrastructure to improve highways, repair bridges and build pipelines and because we know all this, so-called gurus will make the case for dumping stocks and buying gold. Or perhaps it might make you decide to invest heavily in construction-industry ETFs. But study after study has demonstrated that these are the kind of snap decisions that more often than not turn out to be wrong. 

Take, for example, the dot-com craze of the 2000s. Warren Buffett, one of the world's most successful investors, didn't abandon his strategy, and he was heavily criticized for it – at least until the tech bubble burst.

Before you put your money down, study the history of  a stock or investment sector and look where it may go in the future. Consider all the possibilities, not just the most popular one. Don't let yourself be caught up in financial media enthusiasm. 

If you enjoy the speculative side of investing, decide on a small percentage of your portfolio to risk, such as 5% to 10%. If you have a financial advisor, he or she can help you determine how much you could afford to lose.

#3: Don’t make a move until you are sure it's based on fundamentals, not emotion.

In some cases, it may be wise to wait out the market shock before making a move. Just look at what happened in February 2016 when the S&P 500 plummeted to 1,829. There was a sudden dive in U.S. stocks that sent a ripple effect through the markets. Economists were talking up that word "recession," and investors became so scared that they dumped stocks and sought safe haven investments instead. Those who sold at the bottom lost quite a lot of money because just a few months later, by August, the S&P was approaching 2,200.

And here we are again. This time it’s about Trump. When the surprise factor following these election results kicked in, stocks reacted and immediately nose-dived, only to skyrocket a few hours later as investors realized that some of his campaign promises, including cutting taxes, could be good for stocks. The S&P went from 2,129 on Nov. 9 to 2,180 the very next day.

The Bottom Line

The best way to avoid losses when markets get jittery is to set a trading plan that spells out: If A happens, I'll do X; but if B happens, I'll do Y. Granted, many events can't be predicted. But by trading based on fundamentals, it is possible to keep your emotions from hijacking the plane. 

Pam Krueger is the founder of "WealthRamp," co-host of "MoneyTrack" on PBS and national spokesperson for The Institute for the Fiduciary Standard.

 

 

 

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.