“Rule No. 1 in investing is not to lose any money; Rule No. 2 is Do Not Forget Rule No. 1.” -Warren Buffett
The U.S. equity market has been rallying since Donald Trump won the election in November, 2016. Much of the rally has been based on hope and expectations of a pro-growth environment, including corporate tax reform, infrastructure spending, and deregulation. To a large extent, the effects of these expectations have been priced in to the current market valuation; and the political v. policy gap error risk is rapidly becoming a significant factor, weighing in on the sustainability of the market. Despite chaos in the first weeks of the new administration (travel ban protests, resignation of the national security advisor, judicial ruling against an executive order, diminishing likelihood of repealing and replacing the Affordable Care Act, etc.,), the U.S. equity market continues to march forward onto positive territory, due primarily to continuing positive economic data (corporate earnings, consumer spending, housing starts, etc.,) But the market is growing wearisome, and [it] is very much looking forward to actual pro-growth policies from the administration. Absent any real pro-growth policies (within the first 100 days of the new presidency), the equity market may begin to correct. With all the mid-night tweeting and war waging against the media, the president’s efforts seem to have diverted from real policy reforms and governing; and as the political/policy gap continues to widen, so does it heighten the risk of a market correction. Other market headwinds may come from more hawkish monetary policy (Fed hiking interest rates more frequently than expected), and possible trade wars with China and other countries.
Two of the most effective risk management strategies are Position Sizing and stop losses. Investment is a game of discipline and strategies. Like all games, it has rules of engagement. To win at the game, you must know what the rules are and use them to your advantage. Read More