How will a trade war affect the U.S. economy?

The current market volatility is distressing. Any time we see the markets fall by more than 3 percent in a single day, it can be pretty unpleasant.

But the news isn’t uniformly bad. A few things to note:

• Volatility is always part of the “top-of-market” behavior we see in this phase of the market cycle. Remember, the market has been up for more than 10 years. The markets are due to shift into correction mode sooner rather than later.
• A trade war between the U.S. and China will hurt both countries since we have all come to depend upon trade for the health of our economies. Since it’s damaging to both countries, it’s likely that it won’t go too far.
• If this is the beginning of a full-fledged bear market, it won’t last forever. An official bear market is when the closing price of an index moves more than 20 percent below the last all-time high. In the 12 bear markets since 1945, the market has recovered to a new high within 25 months of hitting bottom.

For more discussion of retreats and recoveries follow this link.

Three pieces of advice get through a trade war:

1. Diversify to reduce the damage of a pullback. If you own a balanced portfolio with U.S. stock, foreign stock, bonds and cash, you can expect a historical average of 8 percent growth per year and 60 percent of the volatility of U.S. large stocks. A balanced portfolio usually consists of 45 percent U.S. large stock; 5 percent U.S. small stock; 10 percent international stock; 30 percent bonds; 10 percent U.S. Treasuries.
2. Hold on and ride out the dips. If you hold your investment 10 years, the balanced portfolio as described above would average 8 percent return during every 10-year period since 1926 and it’s never had a negative return over 10 years.
3. Make use of the magic ingredient: great advice and good behavior. If you work with somebody who helps you adjust your holdings when needed and helps you sit still when prudent, then you will be much better off. As the data above shows, the markets will continue to grow. The trick is to be sure your choices and the investments you use don’t get in the market’s way.

To get good advice, I recommend you seek out a CERTIFIED FINANCIAL PLANNER™ professional.

To find a CFP® professional near you, start your search here.

As you visit with financial planners, I suggest a couple things to check:

• Is the advisor always the client’s advocate – a fiduciary advisor?
• Is the advisor only paid by clients, not any financial product manufacturer or distribution network? That would be a fee-only advisor.

These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.

A fiduciary, fee-only, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.

Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.

If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.