Thursday, February 16, 2017

Weird personal finance question about retirement investing in the Trump era

This gets a little political, so I won't be offended if you don't read this. It's mostly about retirement.

As longtime readers of the blog know, I am a very big fan of index funds for retirement investing. I really like the very boring ones (i.e. Vanguard's S&P 500 fund or its "Total Bond Market Index.") Some international indexing seems wise as well.

Weird question: should the election of President Trump change how I do my long-term investing?

After three weeks of watching the White House and the Republican-controlled Congress approach issues, I have a difficult time imagining that significant economic policy shifts will come about anytime soon. I know the President is considering the renegotiation of NAFTA (that would be a pretty big deal), but it's hard to know how much that would change the long-term trajectory of the US or the world stock markets. I presume that there will be some kind of protracted renegotiation and President Trump will sign something, but it's difficult to know how consequential it could be.*

Here's a list of things that I think could matter to the stock market in the short (4 to 8 year) run:
  1. A war
  2. "Spectactular"-level terrorist attacks in the US
  3. Major monetary policy shifts
  4. Major trade disputes
  5. A major natural disaster and poor recovery in a key economic center (San Francisco, New York, etc.) 
  6. Capital controls
These would be major issues no matter who the President would be; I suspect that #3 and #4 are more likely to happen in a Trump Administration. We don't know what President Trump's approach to monetary policy will be. We also don't know how much he plans on doing about trade, other than jawboning other countries.

All of this to say that I tend to think "tomorrow will be like yesterday." For the most part, that's an accurate statement - until it's not. Is there anything fundamentally different about the post-Trump era and its economics that should change where I invest for retirement? I have had the habit of poorly estimating political risk, so readers: tell me where I'm wrong. 

*From a long-term (10-20 year) perspective, I could easily imagine some shifts. The United States holds the commanding heights in terms of its academic science and engineering infrastructure, even as it has seen flattish funding over the last ~16 years. I assert the products of that infrastructure is a huge source of future GDP growth. If major, geographically broad immigration restriction occurs (i.e. targeting China and India) over a prolonged period of time, it seems to me that this will have significant effects on academic science and its labor force. What the academic research enterprise in the United States would look like after that kind of challenge to its current labor force mix is an open question. 


  1. I don't know enough to invest competently on my own, but given the unpredictability and lack of competence of the Trump Administration, I would assume that trying to predict the future and invest accordingly is beyond the mental scope of most people needing to invest for retirement (deities don't need IRAs).

    Some Republican things will get done; SC nominations and "reforming" oversight of banks, for example. The latter could work out really badly for stocks (brokers abusing their clients and the banks abusing everyone driving money out of stocks) but that's not certain (and is longer-term, I think). The former is likely to have less predictable consequences. I don't see enough that is predictable to try to predict the future here. YMMV.

  2. I actually think all of your 1-6 are unlikely. The biggest uncertainty and threat, IMHO is one that Trump, like Obama, will have very little control over and that is Congress playing games over the debt ceiling. Several Democrats have now decided that maybe they would like to use it as a negotiating tool like the Tea Party tried to. And given that Ryan/McConnell are both in charge of dysfunctional caucuses (Ryan is trying to rally support for a tax reform plan and is getting shot down in multiple directions in his own party), it is likely the GOP majority may not be able to get it together, suck it up, and vote for the debt ceiling increase when the time comes. What that would mean for an investing strategy I dunno, because it seems like everything would be hosed.

    1. Your #7 seems more plausible and equally damaging to the stock market. Good call (i.e. it would start the slow move away from the dollar as the reserve currency, possibly?)

  3. "The study finds there is no recovery. Since 2007, U.S. GDP per capita growth has been 1%.

    Think of our country as a company, America Inc., which has more than 100 million full-time employees, with about $18 trillion in sales and $20 trillion of debt. The most serious problem facing it is no growth. In addition, America Inc. has three soaring expenses threatening to bankrupt the company and its shareholder-citizens: healthcare, housing and education."

  4. America will be fine: its had bone head Presidents before and will have them again (to be clear, I don't know that HRC would be better---more predictable yes, but dk better). As long as you don't get caught in a big mkt down draft the decade before you retire you'll be fine with indexing (and, really, aside from every 7 or 8 years how often do those happen?): as you point out, tomorrow will continue to be like yesterday...until its not.

    I still have no idea what the best approach to investing is, and I do it for a living. I do recall one thing from finance class in which the prof said "you're either hedging or your speculating"......

    1. Predictable would probably be helpful, though. The problem with HRC being President would have been that nothing was likely to get done about our debt or any of our other key issues - we don't have a consensus on what or how big the federal government should be, or even (it seems) a plurality willing to take care of it and maintain it until we reach a consensus. We keep hoping that we can have lower taxes and have everything work the same and it doesn't seem to be happening, and we're not willing to either raise taxes or lower spending (when the Rs tried, the government got melted and the Rs did not get the better end of that deal).

      On the other hand, it's not clear if Trump, Pence, or the Rs can solve those problems - if they had a consensus within their party on what to do (or rather, a consensus that won't get them run out of office), they could act better than if HRC were President, but they don't seem to have one. The things they do have consensus on are probably not legal.

  5. Here's a list of things that I think could matter to the stock market in the short (4 to 8 year) run: You missed out on

    7. Stupid and incessant things that #45 blurts!

  6. I wouldn't change your strategy. According to Krugman, the market was supposed to never (yes, he said "never") recover from Trump's victory (he was referring to the large drop in futures as it became clear he would win the election, which as we all know the next day went from red to green). On the night of Brexit, my friend almost cried because he thought everything was doomed. Look at the history of the market. So far index funds have been a good bet. Obviously the people who do this for a living are optimistic about Trump's policies (the market has been doing quite well, so far...). There will always be people in the media trying to scare you. Remember in 2010 when the "great" Roubini told us the Dow was going to 1000? Didn't happen. Like him or not, Trump wants to "win" just like anybody else would. While the market might respond to some of his comments, it's just a temporary fluctuation. Ultimately strong earnings will win out. There is a lot of money overseas that companies do not want to bring into the states because of a high tax rate. Trump has talked about letting them bring it in at a reduced tax rate. Apple, which has already had quite a recent run, will be one of the companies that benefits from this. In short, stick with your strategy. Now, at some point, there will be a drop. But we don't know when or why that will happen. But when it does happen, it's a buying opportunity. Jim Cramer will tell you to sell, but there is no point in selling at a bottom. You live in an incredibly wonderful time and in a country that sits in a good position to capitalize on technological advances. The only thing I worry about is not everybody being able to participate, but if your primary concern is investing you need not worry about that.

  7. As always, markets have risks.

    Here's a few more:

    1)Continued low oil prices. Could lead to more oil patch loan defaults, pressuring banks and bond markets.

    2)Large scale government bond defaults. (Think state pensions.) This would impact bond markets and overwhelm any monetary policy efforts.

    3)Widespread student loan defaults. Impacts would add to problems of both number 1 (bank loans) and number 2 (government debt implications). In addition, collapse of the student loan market would have a deflationary impact on college tuition, possibly pressuring the financial health of many educational institutions.

    4) While the educational system might come under deflationary pressures, the rest of the economy could see a big rise in inflation because of higher minimum wages, the need to deal with deficit spending (inflation makes past debt cheaper), and higher taxes being passed through the supply chain.

    But look on the bright side, a market crash would go a long way toward "solving" the wealth disparity problem.

  8. My view on Trump: he will not miss the opportunity to enrich himself. The most legal way to do it is by increasing the value of the real estate (since he has a lot of it) and devaluating the dollar (I suspect most of his debts are dollar-denominated). TIAA-CREF (I have money there from my post-docs and added IRAs) gives you the option to invest in a real estate fund (it is pricey, though and I believe in low-cost funds). The real estate fund is totally uncorrelated with the stocks. There is a cheaper option of real-estate stock fund, but it correlates with the stocks in general. I just rebalanced my TIAA-CREF portfolio with a mix of ~ 60% stocks (some real estate, I hope they are unrelated to Trump) 40% bonds and set it to rebalance automatically (the option was on my birthday). This is less aggressive than my previous which was ~80% stocks, I read a believable argument that rebalancing (I do not remember how often) to 60/40 is the optimum strategy. I decided to be somewhat idealistic – I put 10% in higher cost new fund, which buys in low-carbon companies TIAA-CREF offers also lifecycle funds – I did not select this option since the costs were higher. All my money in the current job is in a lifecycle fund – after the election I switched to one with a shorter time horizon (which means – with more bonds).