It was widely reported on election night: As the vote tallies tilted in Donald Trump’s favor, a flood of web traffic crashed Canada’s immigration and customs website, while searches for one-way tickets to the Great White North more than doubled. At this point, most of us have decided to stick it out for next four years (or have decided to stay and fight). But even if you’re staying here physically, you might still send your savings to a safer haven. How should a Trump presidency affect the way you save and invest?
When I put this question to a friend who manages a family of funds at a well-known investment firm, he had a one-word answer: “diversification.” It’s advice that has always been wise if you want to keep your nest egg secure, but it’s also advice that is too often ignored. If Trump has changed anything, my friend argued, it’s that diversifying your assets internationally is more critical than ever.
Before getting to why international investment is a good idea, first a basic primer on investment strategy in general. Investors all have the basic objective of generating high returns while minimizing risk. A lottery that gives you a 50-50 chance of tripling your money, for example, has a high return (on average a 50 percent return on your investment) but is also very risky. This is like buying shares in a biotech startup whose drug will either be approved by the Food and Drug Administration, in which case there’s a big payday, or not, in which case it goes bust. Putting the money you would have invested in biotech into a checking account or treasury bills involves much less risk—but also much lower returns on average. In general, investors face a trade-off between higher returns and lower risk.
Because every company presents its own unique, idiosyncratic risks, investors tend to buy smaller pieces of lots of different companies, rather than putting all of their eggs in one basket. Some bets will pay off, others won’t. On average, though, if you make lots of bets on high-return companies, you end up a lot better off than stuffing money in your mattress.
Most investments also have a common component: When the economy tanks, most companies suffer, and when it booms, most companies are profitable. But that doesn’t mean all companies are equally exposed to risk from changing economic fortunes. Construction supplies and office equipment manufacturers, for example, are particularly vulnerable to boom-bust cycles; food wholesalers are not—everyone’s got to eat. Stocks with a lot of marketwide risk tend to have higher returns. But chasing these high returns leaves most investors with exposure to risks that can’t be balanced out by simply buying lots of different companies. (There are some niche industries that actually do well when the economy tanks, like bankruptcy services. Because they offset the risk of other companies, they’re almost like an insurance policy for bad times and hence particularly valuable to investors.)
The argument for investment in different companies or industries applies equally well for diversifying investments across countries. You can get rid of some of the U.S. market-specific risk by diversifying internationally. Sure, there are still shocks to the global economy induced by, for example, a higher price of oil. But as with specific companies, different countries are subject to distinct, idiosyncratic shocks. When a tsunami hits Japan, it’s bad for business in Tokyo but doesn’t affect things all that much in London or New York (or even in Shanghai).
While many Americans’ savings are well-diversified across companies, because we invest in mutual funds at Fidelity or Vanguard, there is a surprising lack of diversification across countries, enough so that economists have a particular term for the phenomenon, the home bias puzzle. (There is even evidence that the home bias afflicts investment decisions across regions within the United States. A classic 2001 study shows that shareholders in Regional Bell Operating Companies tend to live in the areas they serve, so that California investors put their money disproportionately in Pacific Bell and New York investors in NYNEX.)
Returning to the question of investment in the age of Trump, it’s clear from the postelection stock market rally that his presidency may not be so bad for corporate profits (which, economists like to remind us, is very different from being good for the economy overall). At the same time, our president-elect just can’t help shooting his mouth off on Twitter with promises of job- and profit-destroying policies like a 35 percent tariff on imports from U.S. companies operating abroad. Will he make good on these threats, or are they empty symbolic gestures? Who knows? Hence the uncertainty.
The answer to that uncertainty isn’t to put your money into Canadian bonds or the Shanghai Stock Exchange—every economy has its own distinct risks, which themselves may be on the rise, thanks to the possible crumbling of the Euro; the consequences of tightening government control in China; and so on. Better not to try to pick winners. Just diversify.
Decades ago that might have presented a challenge to an everyday investor. But with the rise of mutual funds, it’s as easy as logging into your account and shifting some of your savings from a fund that tracks the U.S. stock market to one that has investments in stock markets around the world. (If you worry that you’ll be kicking yourself for having done so if, say, Pacific Rim stocks collapse tomorrow while the postelection rally continues in the U.S., shift just a few percent of your savings each month.)
Home bias is just one of the investment mistakes many of us make; another is so-called status quo bias: We tend not to bother to readjust investments in response to new information or circumstance. Don’t fall prey to either. There’s no need to flee the country (yet), but there’s also no reason you can’t send at least some of your savings packing.