Mark P. Bernier | Posted on Nov 01, 2016
On Tuesday, November 8, United States citizens exercised their right to elect a new President, as well as federal, state, and local officials, and to decide any number of state-specific referenda, ending the “election exhaustion" that has been expressed and felt by many. In the days and weeks leading up to the event, we witnessed an uptick in market volatility as traders and strategists attempted to reposition themselves seemingly with every headline and poll result.
When the news broke in the early morning of November 9 that the pundits and pollsters were wrong about the expected outcome, investors received another dose of volatility as markets reacted to an outcome that was largely unexpected. Anyone watching overnight futures trading would have seen the Dow Jones Industrial Average indicated to open nearly 800 points to the downside and might have been fighting the urge to call their broker or financial advisor in the wee hours of the morning. Unexpected event outcomes can create the urge to react and take drastic actions with your investments.
Investing is a planned journey that often spans decades, or even generations. Why, then, do some investors find themselves reacting to an unexpected event by liquidating their investments, or taking other drastic steps, and derailing those plans? Many of you reading this article may be thinking about what this recent election means for the direction of the country, the economy, and the markets. To some of you it may be a beacon of hope, to others a bitter disappointment. Regardless, a singular event rarely, if ever, warrants dramatic or drastic change to your investment plans. Consider a quote from famed investor Warren Buffett on October 17, 2008, at the height of the financial crisis: "In the 20th century, the United States endured two world wars…the Depression, a dozen or so recessions and financial panics, oil shocks, a flu epidemic, and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."
Unexpected event outcomes, or event risk as it’s known in the industry, provide investors the opportunity to reassess and perhaps rebalance their portfolios. Rather than making a drastic change, say liquidating a diversified stock and bond portfolio and placing the proceeds in a coffee can, consider a more tactical approach. As an example, you could transition to shorter-term bond investments if you believe interest rates are going to move higher. Another example could be to increase your exposure to construction/engineering companies if you believe that infrastructure spending will be a focus of this next administration.
Whether you are managing your own investments, or working with a trusted fiduciary advisor, avoid the urge to make emotion-driven decisions and consider the long-term impacts to your financial plans that may result from drastic changes to your investments.