How to Cope with Tariff Tantrums…

I am writing this with the sun shining through the window and spring most definitely in the air. Given I started this missive in the middle of winter this is quite a feat! I’m sure James Patterson will have been able to knock out a couple of books in the same time.

The difference is Mr Patterson lives in the world of fiction, and although we have witnessed things even he would have struggled to make up in the last two months, I unfortunately have to write this in the real world.

In fact, this is the sixth attempt I have made at writing this letter. Events have moved so quickly the previous ones had to be crumpled up and thrown in the bin. The fact I am writing this on Trump’s ‘Liberation Day’, when he lets the world know the level of tariffs he will be applying to goods imported to the US, is probably naive on my part but if I waited for a quiet spell who knows when this would reach your inbox.

To be honest the last two months have been a classic example of why you should not make any knee jerk reactions based on the latest headline. The tone and content of my previous attempts has varied dramatically in that time, and if I had been trying to manage investments based on the short term ‘noise’ I would have been all over the place.

Think of the swings we have seen since Trump came in to power. Initial euphoria has morphed into despair and fears of a recession in ten weeks! This is why the annual Dalbar Quantitative Analysis of Investor Behaviour Report always shows the returns achieved by private investors managing their own investments is far worse than leaving them untouched, as they let emotions and headlines cloud their judgement.

The difference in annual returns achieved by those ‘going alone’ and the S&P 500 index over the last 30 years is quantified at just over 2% per annum. That sounds a small amount, but over 30 years the difference in growth achieved by an investment of $100,000 equates to $808,000! (Source – Dalbar QAIB 2024 study) Although the survey is US based I am certain its findings will be the same the world over.

As the survey says it shows that investment returns are more predicated on investor behaviour than fund performance. One of our most valuable roles as advisors is acting as a sounding board when clients start getting the ‘jitters’. It is five years since we had a classic example of this when markets went into a tailspin when Covid started to dominate our lives.

At that time seeing the value of your savings fall by more than 20% in a matter of weeks was obviously jarring, especially as the media was predicting Armageddon ahead. As animals we are hard-wired to respond to fear, and our fight or flight reflexes were being overloaded at that time. Thankfully we were able to talk the few clients we had that were in panic mode ‘off the ledge’ and by the end of the year their holdings were higher than they were before the pandemic.

Although it can feel a relief to move to cash when things are falling it is very difficult to time when to go back in to the market. I once had a conversation with a client who was considering doing this and asked them when they would go back in? They replied they would do so when ‘the market was higher’. It didn’t actually require me to point out the folly of this, and I think verbalising their thoughts was enough to make them see sense.

Markets tend to bottom well before there is any positive news around and being able to put money back in to the market when things are worse than when you took it out is a skill I doubt many of us have!

As for what will happen in the coming months, economically who knows but we can be sure the trees will gain their leaves and the flowers will bloom. And if you want to read anything, the latest Patterson blockbuster is a better bet than a newspaper.

P.S. it has not been widely reported but in the paper that went along with the Chancellors Spring Statement last week, it was intimated the ISA allowance will remain at £20,000 for the length of this parliament.

Although there may be reforms to the amount that can be saved via Cash ISAs, for Stocks and Shares investors it looks as though we will be able to continue to shelter that amount for a while yet. Some good news that unsurprisingly did not make headlines in the press!