In Uncertain Times, Hold This Important Investing Rule Close

We are undoubtedly living in uncertain times. With the new administration in Washington making significant decisions almost daily, the implications of these actions can be far-reaching. For instance, President Donald Trump recently announced steep 25% tariffs on imports from Canada and Mexico, leading to a decline in the stock market. By the time you read this, it's possible that the situation could have changed, demonstrating how unpredictable the market can be.

If you're feeling anxious about what the future holds for the stock market and the broader economy, there’s a fundamental investing rule that you should keep in mind.

Concerns to Consider

Unfortunately, I cannot predict what will happen to the stock market or the American economy in the years to come, and neither can anyone else. Trying to time the market by predicting peaks and valleys is often unnecessary and unwise.

Recent actions—including the introduction of high tariffs—can lead to adverse effects on the economy. To illustrate, when an American company imports lumber from Canada, a 25% tariff means that company must pay that tax to the U.S. government. Naturally, when they sell that lumber, the price will rise to accommodate the additional cost, leading to higher consumer prices.

If many prices rise, inflation can follow, diminishing the buying power of our money. If wages do not grow with inflation, people will find themselves unable to afford as much. The risk of inflation combined with job losses could potentially lead to a recession.

I want to be clear: I am not predicting a recession, but it is a possibility that we can't ignore. Historically, recessions are a part of economic cycles, and if a recession is severe enough, it could transform into a depression.

Additionally, the stock market may decline as economic growth slows. A drop between 10% and 20% is termed a "correction," while a fall of over 20% is classified as a "crash." These fluctuations are common in the stock market.

Follow This Critical Investing Rule

In light of these uncertain times, what should investors do? It is crucial to remember this fundamental investing rule:

Never keep any money in the stock market that you will need within the next five to ten years.

This rule is straightforward yet important. It applies in all types of economic and political climates since we can never forecast what may occur in the near future.

Even in stable economic times, unexpected events can derail the markets—these may include natural disasters, terrorist attacks, or even global pandemics.

If you ignore this rule and find yourself in a situation where the market has plunged, you might be forced to sell investments at a loss just to cover essential expenses, like your child’s schooling or a home purchase. Clearly, this is a position you want to avoid.

Actions to Consider During Uncertainty

What steps can you take while navigating through uncertainty? Here are some suggestions:

• Assess your stock investments. Ideally, you should hold shares in strong companies that can withstand economic downturns. Investing in companies that are overvalued or less established might prove risky during difficult times.
• Look for healthy and growing companies that pay dividends. While troubled firms might cut or eliminate their dividends, financially stable companies usually maintain their payouts. If the market stagnates for an extended period, dividend income can be reassuring.
• Move any funds you anticipate needing in the next five years into more stable investments, like certificates of deposit (CDs), money market accounts, or bonds. For more caution, consider doing this with funds intended for use within ten years.
• Maintain an emergency fund—ideally, enough to cover at least three months of living expenses. This safety net can help you manage unexpected financial hardships, whether due to job loss or unexpected expenses.

While these strategies are particularly relevant during uncertain times, they remain sensible at all times. The stock market has experienced multiple downturns but generally rebounds and reaches new highs. Remember to remain hopeful about the future but prepare for unforeseen events, ensuring that your hard-earned money stays secure.

Investing, Market, Economy