The Most Common Question: How to Invest in the Trump Era?
By John H. Robinson, Founder/Financial Planner (February 16, 2025)
Since nearly every client meeting request I receive begins with some variation of this question, I thought it prudent to include my detailed response in our content (newsletter and blog) for everyone to read. To begin, I remind readers that I never express my personal political views in my blog posts. References to political party policies will only be made in the context of investing. The potential socioeconomic ramifications of policy decisions are beyond the scope of this discussion.
In most of the meetings and conversations, the primary concern clients express relates to the implementation of political and economic policies that are untested and represent a dramatic departure from the policies of previous administrations of both parties. These include the application of tariffs as a tax revenue generation mechanism, the reduction of government spending by eliminating certain departments and agencies, the increase of the national debt as a result of tax law extensions and cuts, as well as concerns about global military/security threats. My approach in the article will be to opine on each individual asset class and to provide unambiguous guidance.
The Low Hanging Fruit – Avoid Bond Mutual Funds, Including TIPS funds
I continue to be amazed and baffled by the number of pundits who still expect the Fed to continue to reduce interest rates. At this time, the current federal funds rate is 4.33%, and the Federal Reserve Board has indicated that it is unlikely to cut further until there is evidence that inflation is continuing to decline toward the Fed’s stated 2% goal. In its recent comments, the Fed has noted that inflationary persistence makes the Fed reticent to rush into any further interest rate cuts, and this is without consideration of the potential inflationary impact caused by the imposition of tariffs.
Unless you really believe there is a compelling case for the Fed to reduce interest rates further, my advice to all FPH clients is to avoid bond mutual funds and to invest cash from maturing bonds and CDs into money market funds. The current yield on money funds is around 4%.
In my view, there is a greater likelihood that inflation will rise and that the fund will be compelled to raise rates. If this unfolds, then bond fund holders can expect to see their principal values decline. My advice will be to start buying 12-month or longer CDs again only when the yields return to 5%.
There is a large segment of the financial planning community that agrees with my thesis that rising inflation and higher interest rates are more likely than not but are preaching Treasury Inflation Protection Securities (TIPS), including TIPS mutual funds as a solution. I could not disagree more. The notion that TIPS (and TIPS mutual funds) will see price appreciation in a high-inflation, rising interest rate environment is a myth.
In November 2024, I posted my article Not So Hot TIPS, in which I presented the performance of TIPS index funds over the past decade. I noted that the TIPS index had four down years, the most severe of which occurred during the 2022 period, in which inflation spiked. I also noted that the low coupon rate on individual TIPS causes them to have volatility characteristics akin to zero coupon bonds.
In my experience, a better way to invest in a rising interest rate environment is to extend maturities on CDs and bonds as rates are rising. By purchasing individual securities and spreading out the maturities, you can mitigate market value declines and lock in higher rates for longer periods of time after inflationary pressures subside.
The 800 lb. Gorilla – Should We Get Out of Stocks?
By and large, the 800 lb. gorilla in the room that clients want me to address pertains to the stock portion of their portfolios. Specifically, the knee-jerk consumer response to perceived extreme policy shifts is to sell stocks. I suspect that some of the folks with whom I speak are hoping that I will lean into this position, too. I suspect that it would also bring some sense of satisfaction on an emotional level as a tacit rejection of Trumpism. However, it is worth reminding readers that the stock market is generally pretty efficient at incorporating all known information and future expectations. As a point of reference, the stock market actually bumped up following the election and is currently sitting near its all-time high.
As I explained in the last newsletter, the reaction of the market to the election likely reflects the stock market’s belief that corporate taxes will remain low for the next four years and many provisions of the Tax Cuts and Jobs Act will likely be extended or made permanent. Lower taxes mean more profit for corporations. I really don’t think the near-term analysis needs to be more complicated than that. Put more succinctly, while there is the possibility that policy decisions produce disastrous longer-term economic outcomes, the possibility also exists that the administration's policies are good for corporate America (even if they widen the wealth gap between poor and affluent consumers).
Here is my specific stock market advice – If you are approaching retirement or are already in the spending phase, given that the stock market is near its all-time high, it may be a great time to sell stocks to ensure that you continue to have 5-7 years' worth of expected spending distributions banked in investments that can not experience market value declines (e.g., CDs and money market funds).
Similarly, if you usually have 4-5 years’ worth of expected distributions in safe investments and are nervous about the future, feel free to sell some equities to extend the number of years of “banked,” no-risk distributions to 6-7 years.
As always, I do not recommend selling as a matter of market timing. In fact, I will probably try to talk you out of making such extreme portfolio moves. For investors saving for long-term objectives, I recommend maintaining your stock market exposure and continuing to add during any downturns that may come along the way.
How to Protect Against the Possibility of Prolonged Extreme Down Market Conditions
Many clients fear that if President Trump's brash, untested, un-supported policies are implemented by a feckless, submissive Republican congress, it will trigger disastrous economic consequences such as high or even hyper-inflation, loss of trust in the dollar as a result of ballooning federal debt, high unemployment, etc. With that dark and foreboding backdrop, they want to know what can be done to preserve their wealth.
In the last newsletter, I mentioned there is no established guideline for allocating to gold or Bitcoin, but the prevailing wisdom in financial planning circles seems to be a 3-5% portfolio allocation with the idea that these potential “disaster hedges” may hold their value or appreciate as panicking investors flock to them in a “flight to safety.” I continue to stand by that guidance and encourage people to re-read my November commentary along with my article on the role Bitcoin may play in portfolios as both a disaster hedge and a potential growth investment [Is Bitcoin a Legitimate Asset Class? ]
What About Real Estate as a Hedge Against Inflation and Market Extremes?
This is a popular theme that has been advanced by reputable financial leaders such as Jamie Dimon in recent months. However, I am less sanguine on real estate as an inflation hedge or a disaster hedge. In my opinion, high inflation and high interest rates coupled with high unemployment could crush the real estate market. Intuitively, borrowing rates would lower demand for real estate. Fewer buyers equals lower demand, which should also mean lower real estate prices.
Here are several third-party articles that support and expand upon my guidance:
How to protect your portfolio against risks tied to President-elect Trump’s tariff agenda
Worried About Market Turmoil Under Trump? Look to the Past.
The Potential Portfolio Impact of Trump Policies & Tariffs
Bitcoin Is a Better Buy Than Gold in 2025 and Beyond
Bitcoin vs. 1-ounce gold bars: What's the better investment
John “J.R.” Robinson is the owner/founder of Financial Planning Hawaii and Fee-Only Planning Hawaii and is a co-founder of personal finance software maker Nest Egg Guru.
