Wow, how about that, Donald Trump is the President of the USA. Who would have thought an ex- reality TV star and bankrupt, with a litany of pending court cases and questionable morals, could achieve the most powerful position in the western world. But I guess it goes to show that anything is possible.
Putting aside political implications, it certainly shows how fragile investment markets are when an unexpected event occurs. As news spread of Trump’s victory, world markets began plummeting in a blind panic. Only to rebound 24 hours later when everyone realised he may not be the ‘ogre’ they first thought. Time will tell on that one!
You can run but you can’t hide from the macro environment
But Trump’s election does serve as a spectacular reminder of the effects of macro environmental events. These events are the large scale global happenings that create havoc with your investments. Unfortunately, it is very difficult to guard against their effects.
If you recall we have had in recent years ‘Grexit’ then ‘Brexit’ and now, as I like to term it, ‘Trumpet” These were all very large (macro) events that had serious repercussions on financial markets across the globe. Of course, how severe these repercussions are, is determined by the counter actions provided by Governments.
Natural disasters can also trigger market panic depending on where they occur. A tidal wave across New York City would induce a complete financial meltdown I would suggest. But the same tidal wave hitting an uninhabited coastline would do absolutely nothing to markets.
Most investors are familiar with the old saying, ‘don’t put all your eggs in the one basket’ – the classic risk reduction method. Diversification is the best defence against volatility; done well it works a treat, but not always.
According to the man who ‘wrote the book’ on this stuff, Harry Markowitz, there are actually two types of risk factors affecting our investments, diversifiable and non-diversifiable risk. This simply means that there are risk factors that can be eliminated through diversification and there are risk factors that can’t be. So there will be times when world events make your impeccably diversified superannuation fund fall like the proverbial lead balloon.
But there can be a bright side. Macroeconomic events seem to always send investors scurrying for the exit which in turn sends asset prices tumbling. Because of the unknown global ramifications, investors seem to always let their fear rule their actions and just get out at all costs.
Taking action in the face of adversity
It is at these times that astute investors are given a golden opportunity to increase their investments at cheaper prices. Now I am not saying this would be an easy course of action. I have felt fear many times over the years as various events affected my investments. So it is certainly not an easy decision.
I’m also aware that there is a sense of gambling involved, so careful consideration as to the size and type of event is the order of the day. Always, let your experience be the guide and err on the side of caution. We are talking about investing money after all.
Certainly, before making any investment decision, understand the factors that are driving investor fears. Each situation will have a time frame to resolve itself. And that’s when all worries fade into oblivion, and markets go up. For Trump’s election, it was only one day!
So try to understand the factors that drive markets. Macroeconomic events are not normally directly related to stock market performance other than fuelling it with the adrenaline of fear. Try to keep a clear and rational mind during any event as there can be some great opportunities presenting themselves.
And finally, to quote the great Warren Buffett who so brilliantly said – “Be fearful when others are greedy and greedy when others are fearful”
