We certainly seem to be in uncertain times right now. The new administration in Washington is making big moves seemingly every day, many of which have possibly big ramifications. Just today, as I first started writing this, President Donald Trump announced hefty 25% tariffs on Canada and Mexico — and the stock market headed south. By the time you read this, it’s entirely possible that changes to that tariffs might already have happened. Nothing seems like a sure thing.
If you find yourself worrying about what might happen in the coming year and beyond, there’s a critical investing rule to keep in mind.
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Reasons to worry
I wish I could tell you exactly what the stock market — and, indeed, the American economy — will do over the coming years. But I can’t, because no one knows. (That’s why it makes little sense to engage in “market timing” — trying to get in and out of the market at optimal points.)
But I will say this: Actions such as setting steep tariffs can lead to unpleasant consequences. Remember that a tariff is a tax typically paid by an importer. Imagine, for example, that an American company is importing, say, lumber from Canada. If there’s a 25% tariff on that, the company will have to pay the U.S. government that 25% tax. When the company turns around and sells that lumber in the U.S., you can be sure that the price will go up, in order to make up for that 25% premium paid.
Lots of prices going up will likely spur inflation, shrinking the purchasing power of our dollars. If wages don’t keep up with inflation, we won’t be able to buy as much. If inflation is accompanied by rising unemployment, then a recession could be triggered.
Again, I am not predicting a recession, but an economic slowdown could happen in the year(s) ahead, delivering a recession. (In fact, recessions are rather inevitable, and they’ve happened many times in the past.) If the recession is deep enough and sustained enough, it might even qualify as a depression.
Meanwhile, the stock market may well pull back, too, as it tends to do when the economy is sputtering or slowing. If the stock market falls by between about 10% and 20%, it will be deemed a “correction,” and if it falls 20% or more, it will be a “crash.” Crashes and corrections also happen not unfrequently in the stock market.
Remember this important investing rule
Given these uncertain times, what should we investors do? Well, it’s extra important to remember — and to act on — this critical investing rule:
Don’t keep any money that you expect to need in the next five (if not 10) years in the stock market.
That’s it — it’s rather simple. It’s vital to keep it in mind these days, but it’s really important in any kind of economic or political environment, because we still can never know what’s going to happen in the near future.
Even in the best economic conditions, there might be some big unexpected event(s), such as a widespread environmental disaster, a major terrorist attack, or a pandemic, that can throw the stock market off course for a short while or a long while.
If you don’t heed this rule and the stock market suddenly falls sharply and stays down for some years, you may be forced to sell some holdings at depressed prices to raise the cash you need for, say, your kid’s tuition payments or a down payment on a home. You don’t want to be in that position.
What to do
So what, specifically, might you do in the face of uncertainty? Here are some ideas:
- Evaluate your stock holdings. Ideally, you may want to be invested in robust companies that are able to ride out an economic downswing. If you have a lot of money in companies that are relatively unproven and that seem significantly overvalued, they may fall harder than other companies.
- Consider owning shares of a bunch of healthy and growing dividend-paying stocks. Yes, a company in trouble may reduce or suspend its dividend, but healthy and growing companies are less likely to do so. If the stock market ends up stalled for a long period, you’ll at least be collecting dividend income.
- Move however much money you expect to need in the coming five years into less volatile investments, such as certificates of deposit (CDs) or money market accounts or bonds. (To be more conservative, you might do so with funds you expect to need within 10 years.)
- Be sure to have an emergency fund at the ready, chock-full of money you would need to keep yourself afloat for at least three months in case your household faces a financial blow — such as a job loss, a costly health setback, or an expensive home or automotive repair.
These suggestions are well worth considering in particularly uncertain times, but they always make sense, really. Our stock market has swooned and stalled many times, but has always recovered and gone on to set new highs. Keep that in mind and always hope for the best, but prepare for the worst, just in case, and don’t leave your hard-earned dollars at risk.
