Navigating Uncertainty: Key Investment Strategies in Turbulent Times

Uncertain times are upon us as significant changes come from the new administration in Washington. Every day, new announcements have potential ramifications for the economy. Just recently, President Donald Trump declared 25% tariffs on imports from Canada and Mexico, prompting a downturn in the Stock market. By the time you read this, further updates to these tariffs may have already occurred. Certainty seems elusive.

If you find yourself concerned about future developments, it’s important to remember a crucial investment guideline.

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Factors Contributing to Economic Worry

While it would be ideal to predict the future of the Stock market and the American economy, the reality is that no one can say with certainty what will happen. This uncertainty underscores why “market timing”—trying to enter and exit the market at just the right moments—often proves fruitless.

It’s important to understand the implications of decisions like imposing steep tariffs. A tariff is essentially a tax paid by importers. For instance, if an American company buys lumber from Canada and incurs a 25% tariff, that cost will likely inflate the selling price in the U.S. Consequently, consumers will pay more, contributing to overall inflation. If wages do not rise in tandem with inflation, purchasing power decreases.

Furthermore, should inflation rise alongside increasing unemployment, a recession could follow. While I am not forecasting a recession, it is a possibility worth acknowledging. Historically, recessions have occurred periodically, and if a recession is severe and prolonged, it risks evolving into a depression.

In tandem, the Stock market may stagnate or decline, particularly during economic slowdowns. A drop of 10% to 20% typically qualifies as a correction, while a fall of 20% or more is classified as a crash. Over time, both corrections and crashes are not uncommon occurrences in the Stock market.

Essential Investment Rule to Remember

In light of these turbulent times, investors should adhere to this important rule:

Do not keep any money you anticipate needing in the next five (or even ten) years in the Stock market.

The simplicity of this advice does not diminish its importance. This principle is crucial during periods of economic or political uncertainty, as future events can never be fully predicted.

Even in optimal economic conditions, unexpected events—such as natural disasters, significant political unrest, or public health crises—can disrupt the Stock market both in the short and long term. Ignoring this rule might force you to sell stocks at depressed prices to cover needed expenses, such as your child’s education or purchasing a home. Avoiding such scenarios is paramount.

Recommended Actions Amid Uncertainty

What steps should you consider in this climate of uncertainty? Here are some strategies:

• Review your Stock portfolio. Prioritize investments in stable companies that can withstand economic downturns. Allocating funds to overvalued, untested companies may lead to greater losses.
• Consider holding shares in healthy, dividend-paying stocks. While struggling companies might reduce dividends, those that are growing are less likely to do so. If the Stock market struggles for extended periods, dividend income can provide some financial relief.
• Allocate any expected funds needed within the next five years into safer investment options like certificates of deposit (CDs), money market accounts, or bonds. For added caution, consider extending this to ten years.
• Maintain an emergency fund that covers at least three months of expenses to safeguard against unforeseen financial challenges, such as job loss, health crises, or unexpected home repairs.

These recommendations are prudent, especially during uncertain times, but they are beneficial in any market condition. Historically, although the Stock market has encountered numerous declines, it has consistently rebounded and achieved new heights. Therefore, remain optimistic while preparing for potential challenges—do not unnecessarily risk your hard-earned money.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.