Are You Ready For The US Election?

Vasu Menon outlines a three-point strategy to get your portfolio ready for the next President of the USA.

It seems that no sooner have we negotiated one tricky stock-market obstacle than another comes hurtling around the corner at lightning speed.

It wasn’t that long ago when dealers and traders were chewing their nails down to the quick over a possible interest-rate hike by the US Federal Reserve. There’s another one of those to contend with shortly.

But it would appear that traders have learnt to play the Fed like a fiddle. If equity and bond market should react badly before a Fed meeting, then the rate-setting committee is less likely to hike the cost of borrowing.

While the markets might have a hold over the Fed, it is unlikely that “election tantrum” will sway the US electorate, when they have to choose their next president on 8 November.

The market has already made it clear that they do not want Donald Trump.

Never was it more obvious than in the aftermath of the first televised debate between Trump and Clinton. As soon as it was evident that Hilary Clinton had won the war of words, global stock markets ushered in the result with a resounding round of applause. But American voters are unlikely to pay much attention to that.

As investors, we have a couple of choices. Risk-averse investors might want to position their portfolios more conservatively. That generally means packing the portfolio with more bonds and other fixed-investment instruments.

The value of these investments is unlikely to react too violently to the outcome of the actual election result. In other words, bonds, because they could provide a level of certainty that some investors crave, could help dampen portfolio volatility.

With a bond you are more likely to know, at the outset, the returns you could achieve from the investment. You should know the exact timing and amounts when your coupons will be paid, the date when you will get your money back and the yield on the entire investment at maturity. For some investors, that level of certainty is priceless.

But there is a price to pay for the certainty.

The cost could be lower returns than if the money should be invested in shares. That is why stock market investors demand a premium for owning shares.

If investors are prepared to assume the risk for owning shares, then they also insist that they are rewarded for doing so. Consequently, over the long term, shares tend to do better than bonds.

In the short to medium term though, stock market volatility could be serious deterrent for those who are either unable to or unwilling to tolerate sudden movements in the value of their portfolios.

However, the upcoming US Presidential election could be an opportune time to buy good shares at bargain prices. If Trump should show signs of gaining popular support, stocks markets around the world could slump.

But Peter Lynch, arguably one of the most successful fund managers of our time, once said that after the great correction of October 1987, the end of the world and the end of the banking system were widely predicted.

Of course, nothing of the kind ever happened. The world did not end and nor did the global banking system. It was, in fact, one of the best times to pick up the pieces that had been left behind by those who were quick to desert the stock market.

Time and again, the stock market is hit by one-off events that depress the price of good assets. As investors we can choose to follow the crowd or use the information we have about good companies to good effect.

But good information is useless without the willpower. Question is whether you have the willpower to act when the opportunity come knocking at your door.

A version of this article first appeared in the Straits Times.

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