Trade negotiations have been front and center for months. Discussions with China seemed to have stalled, prompting the U.S. to increase tariffs on certain imported goods in early May. Additionally, we’ve seen tariffs used as leverage, like in the recent experience between the U.S. and Mexico over immigration. With all these moving pieces, it can make investors nervous about their investments.
Given the heightened trade tensions, we want to talk about the way we view these types of events. As we have discussed many times with our clients, risk and return are related. An example we often use to illustrate this point is the relationship between stocks and bonds. Stock investments have historically outpaced bond investments, but with a much higher degree of volatility (higher potential returns come with higher risks).
One factor that drives risk is uncertainty. When it comes to trade negotiations, or any news story of the day, uncertainty surely increases. Traders (these are people who try to make their money by buying and selling every day) ask questions like: Is this good or bad news? How long will this event continue? What will this do to the economy? Which companies will be impacted?
Those traders will buy or sell securities based on their assessments and the opinions of the daily news. Given that stock markets fell in May as trade negotiations were front and center in the media, it makes sense to think traders felt the news was bad for stocks.
But, we are not traders. We are investors, and we think differently about our investments. We focus on much longer time horizons (decades, not days) and let evidence (not opinions) drive our decision making. In our minds, when uncertainty increases, so does risk. And, since risk and return are related, expected return should typically increase as well. Therefore, the price declines that may occur from increased uncertainty have historically resulted in investors achieving higher rates of return in the future.
While it may be tempting from time to time to switch into the trader mentality or obsess about the nightly news, it is wise to always come back to why you are investing. If our financial life goals changed as much as the news, we might become traders. But, the reality is that our goals are longer term and our investment approach and investment mindset should be aligned with that horizon.
Long-term investing neither assures a profit nor guarantees against loss in a declining market. Past performance does not guarantee future results. Stock investing involves risks, including increased volatility (up and down movement in the value of your assets). All investing involves risk, principal loss is possible.