Stop guessing, start investing: Why fear-driven moves are a fool’s game

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If you’re recommending changes to your clients’ portfolios because of Donald Trump or tariff concerns, those clients should get another advisor.

The actions of the U.S. president — and, just as importantly, the reactions of other nations and affected businesses — are unknowable. Guessing about any of that and acting on it is a fool’s game.

For those with a long-term investment goal to maintain the purchasing power of their money and grow it further, exposure to the stock market is a good idea. That expectation of higher returns includes periods of losses. Those losses are as certain as they’re unpredictable. The only way to get the longer-term benefits reliably is to live through the pullbacks.

In the past five years alone, we’ve seen a global pandemic, inflation spike and retreat, interest rates go down, then up, then down again, Russia invade Ukraine, and Israel go to war. The global economy found its way and the stock market followed. The current uncertainty is no worse than what we’ve already seen.

There are real human costs to the recent political machinations, including both threatened and imposed tariffs – and there are likely more to come. It’s possible to have empathy and compassion for those affected while still recognizing the lack of long-term financial impact.

The financial industry excels at leaning into human emotion and exploiting it for gain. Fear is a powerful force. Companies play into this by confirming things are terrible, and then offering actions to “take advantage” of the situation or protect against doom. Who wouldn’t want to protect themselves from terrible times? Yet, these actions are ineffective and sometimes downright dangerous.

Financial services companies are putting out articles suggesting strategies to counter the impact of actions the Trump administration may take, or implying there are ways to forecast how the market will react.

For readers without a deep understanding of economic modelling, much of the content being generated gives an impression of certainty, which could lead to misunderstandings. There’s no way to predict the president’s actions or how other nations and companies will respond, so there’s no reasonable move to make.

What’s more galling is these firms’ networks are made up largely of investment advisors who must get client permission before placing trades. With hundreds of clients, making significant portfolio shifts simply isn’t doable. These firms start with a bad idea and then set an expectation they can’t deliver, all while their advisors remain focused on sales goals.

Nobel Prize-winning behavioural economist Richard Thaler once said it’s far more profitable to take advantage of people’s weaknesses than to correct them. It’s bad business to tell a client “No,” even if it’s in their best interest. The real motivation for advisors who do set realistic expectations and stand their ground is that they can build a solid, long-term client relationship and avoid uncomfortable future meetings. For an advisor, that’s a very sensible long-term goal, but it may not align with their firm’s sales goals.

Gloomy forecasts don’t always turn out

For those who still think we’re facing certain doom, let’s look back at other times people felt equally sure. Many were convinced the stock market would collapse in 2020 when the pandemic hit.

Others were sure tightening monetary policy would cause a recession in 2022 or in 2023 – or maybe this year? Who thought that when Iran sent missiles into Israel, oil prices would skyrocket? Who was sure Mr. Trump wouldn’t win that first election? We’re often certain of things that don’t turn out the way we expect.

In making the argument for uncertainty, one might feel all hope is lost. That couldn’t be further from the truth. Despite all the uncertainty, the S&P 500 returned 14.53 per cent on a compounded annual basis, including dividends, for the five years ended Dec. 31, 2024 – even with an 18.1 per cent loss in 2022. Investors who pulled out in 2022 during that drawdown, waiting for a recession that still hasn’t arrived, would’ve missed two big double-digit return years.

A solid long-term strategy only works for those who also have a solid short-term strategy. Any money a client anticipates needing in the next couple of years shouldn’t be invested in market-exposed or illiquid assets. A high-interest savings account is great for that. That lets them stay patient with their long-term plan and prevents them from having to sell investments at a low point to meet short-term needs.

Colin White is president and chief executive officer of Halifax-based portfolio management firm Verecan Group of Cos.