Before the November election, there was speculation, and plenty of it, as to what a Trump presidency might mean to the markets.
Most of those predictions were dire — mainly because Donald Trump is an unknown, and Wall Street doesn’t like uncertainty. In addition, some of his campaign promises and proposed policies, as well as his personal history with debt, didn’t bode well for things like trade or the deficit.
But when Trump was elected, the stock market went on a record-setting run, and that worry turned to relief, which turned to all kinds of confidence.
Sort of. Over in the bond market, it was a different story. Labeled the “Trump Thump” by some, more than $1 trillion was wiped out across global bond markets in just days. The usually boring bond market saw a swift shift in sentiment, as investors worried about a rise in interest rates and inflation – which are negatives for bonds.
Conservative investors — who like bonds for the reliable income stream and the diversification they offer — watched and worried as the interest rate spiked and usually stable sectors, such as consumer staples, telecom and utilites, which enjoyed a run-up in the previous six months, dramatically lost value.
Aggressive investors probably felt fine; they were riding the equities all the way up. But conservative investors felt a sharp, unnerving pain in their portfolios.
We answered lots of phone calls from people wondering what the heck was happening and what they should do about it. I’m sure most advisers did.
And we said, “Those are great questions; let us tell you what’s going on.”
We explained why those losses were happening — and that it was unclear whether the sell-off would continue, or if investors might decide they’d been wrong about the Trump presidency and quickly start buying back the bonds they just sold.
But more important, I think, we assured them that short-term pain can lead to long-term gains. And that if they could hold on — as long as they could live off their other income streams and weren’t put into a position where they had to sell their bonds — they may be fine. If you hold an individual bond to maturity, you’re spared the impact of price fluctuations.
This is why many people get into bonds in the first place — it’s a more sustainable income plan. Whether it’s an election or some other kind of global event, their overall portfolio can typically sustain this types of volatility.
And, looking forward, higher interest rates — or, at least, more normal rates — are, in general, a good thing. Ten years ago, interest rates were closer to 4% to 5%, instead of the zero to 1% people are getting now. So, as painful as it is right now, and there’s that disconnect between the rise in the market and some of these more conservative portfolios lagging behind it, eventually, the interest rates will catch up.
If you have invested in a bond fund, you know that every day there are bonds that are maturing and coming due. And in turn, the fund will be buying new bonds at this new interest rate. So, although there is a temporary loss, better income-producing vehicles are being forged, with higher yield, better dividends and better coupon payments.
To be clear, you must be absolutely sure this position is sustainable for you. Talk to your trusted financial adviser to provide guidance so, hopefully, you won’t have to sell and can hold on during these upsetting moves in the market.
Matthew C. Peck has his CERTIFIED FINANCIAL PLANNER™ certification and is co-founder of SHP Financial. He is insurance licensed and has passed the Series 65 license. Peck is the author of “Mind the Gap: The Cracks in the American Retirement System” and is co-host of the “Retirement Road Map” radio show.
Kim Franke-Folstad contributed to this article.
Investment Advisory Services are offered through SHP Wealth Management LLC, an SEC registered investment adviser. Insurance sales are offered through SHP Financial, LLC. These are separate entities, Matthew Chapman Peck, CFP®, CIMA®, Derek Louis Gregoire, and Keith Winslow Ellis Jr. are independent licensed insurance agents, and Owners/Partners of an insurance agency, SHP Financial, LLC. In addition, other supervised persons of SHP Wealth Management, LLC are independent licensed insurance agents of SHP Financial, LLC. No statements made shall constitute tax, legal or accounting advice. You should consult your own legal or tax professional before investing. Both SHP Wealth Management, LLC and SHP Financial, LLC will offer clients advice and/or products from each entity. No client is under any obligation to purchase any insurance product. SHP Financial utilizes third-party marketing and public relation firms to assist in securing media appearances, for securing interviews, to provide suggested content for radio, for article placements, and other supporting services.
Matthew C. Peck has his Certified Financial Planner and Certified Investment Management Analyst certifications and is co-founder of SHP Financial. He is insurance licensed and has passed the Series 65 exam.
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