Whether it’s Tariffs or Trump we’re talking about, it seems that the ‘T’ word can wreak havoc with future financial planning.
Last April’s ‘will they, won’t they’ tariff plan wiped over eight trillion dollars from the value of the world’s stock markets, translating into alarm for those relying on company shares to fund their future pensions and other spending plans.
Last week, Trump was at it again, threatening countries that oppose his plan to take over Greenland with trade tariffs as punishment, before withdrawing them in a sudden move three days later.
Political volatility nearly always comes with corresponding stock market volatility, and last week was no exception.
It can be disconcerting to look at your pension savings and discover they’ve ‘lost’ thousands of pounds overnight. Some people might even be tempted to sell the investments they hold in pensions and ISAs because the rollercoaster ride Trump sends them on is bad for their mental health.
But in times like these, it’s more important than ever to hold firm to the ordinary principles of investing: make sure your portfolio is diversified, ensure you’re comfortable with the risk you’re taking and remember that over most long-term periods investments outperform cash.
Why tariff threats affect your investments
The main reason that Trump’s posturing – whether its tariffs or threats of military action over Greenland – knocks the value of your investment is that the stock market hates uncertainty. Usually, the first reaction to any form of global issue – whether it is a natural disaster or a geopolitical flashpoint – is for the stock markets around the world to fall sharply.
Equities, also known as company shares, tend to fall the fastest and furthest, while the price of assets like gold and silver tend to rise. These are known as ‘safe haven assets’ because many people believe they will hold their value in the event of a crisis.
As the dust settles though, the market begins to differentiate between different types of company and how they will be affected by the threat.
In the case of Trump tariffs, companies in certain sectors of industry would have been more affected than others, particularly those that import to the US. Those companies bore the brunt of falls later in the week.
Joachim Klement, analyst at stockbroker Panmure Liberum, said that industrial and automotive companies would have been particularly hard hit by Greenland tariffs. His list of the most affected British stocks included FTSE 100 industrial giant Smiths Group and aerospace manufacturer Melrose.
Conversely, companies that do better when the global environment is choppy lost less value, including defence stocks, because countries ramp up their defence spending when the geopolitical landscape is risky.
In the UK, that’s stocks like BAE Systems and Babcock. Other assets that do well when life looks riskier include gold and silver, seen as ‘safe haven’ assets that are a good place to put your money in a crisis.
As the threat recedes, though, these assets fall again in value and other stocks rise. The market begins to stabilise as investors consider the other factors driving what they buy and sell, including the economic performance of different countries and industries and the financial and market positions of different companies.
That’s until another global shock shakes the markets again, something that seems likely to happen sooner rather than later with Trump at the helm.
What happens next?
The posturing we saw last week was what analysts often call ‘short term noise’, which affects the markets for a while before falling away.
Much of the money that was ‘lost’ in the early part of last week may already be regained by the time you read this article.
If that’s the case, the only people who have lost out to Trump’s posturing will be those who have sold shares or funds while they were lower than expected.
As Jason Hollands, Managing Director at wealth manager BestInvest points out, Trump’s tendency to back down from opening gambits is creating a ‘febrile, short-term environment’ for the markets, which can be unsettling for investors.
‘Sometimes, indeed quite often, the right thing for investors to do is try and stay calm and not panic sell in the face of worrying headlines and market jitters,’ he says.
Andrew Prosser, head of investments at trading group InvestEngine, says it is important for investors to accept volatility.
While it might be hard to watch, it’s natural to see your investments go up and down in value – it’s something every investor just has to accept,” he says.
What can you do about it?
As an investor, accepting that your money is at the mercy of Trump’s announcements can be hard to take, so there are a few things you can do.
The first is to take the long view. Investment should only be something you do for a timeframe of five years or more. Studies such as the Barclays Equity Gilt Study, which look at the historic performance of assets, show that over longer periods of time investors almost always win out.
‘History shows that markets are more likely to rise over the long term, and some of the strongest days often follow the sharpest declines,’ says Prosser.
So don’t sell up when markets are falling due to tariff talk.
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The next thing is to ensure that your investments are diversified. This means holding a number of different investments – like stocks, bonds, gold and cash — that won’t all perform the same.
‘Diversifying across different investments, sectors and parts of the world means all your eggs aren’t in one basket. So, no matter what happens to markets, you should always have something going in your favour,’ Prosser says.
Finally, it can help to reframe turbulent times like these as an opportunity to top up your pension. If you were going to put money into investments anyway, buying them when the market falls is like stumbling upon a really good January sale.
Snapping up good quality assets at a bargain price can pay off later. Perhaps one day, when you’re getting your pension, you might be raising a glass to Trump to thank him for creating a buying opportunity, despite the short term stress it can cause.
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