“Don’t risk what is important to you, to get what is not important to you.”
-Warren Buffett
PARADIGM SHIFT
How Much Risk Do You Want?
Since the election of President Donald Trump, the news has been rife with speculations over what that means for the markets.
Markets like predictability. It’s why they often favor a balance of opposing ideas among Congress, and between the Congress and the President.
But while some uncertainty has declined (we know who our next President will be), there still remains a lot of uncertainty as to the net effect of all proposed changes.
Markets love the idea of cutting regulations. That is a tailwind to growth.
Other outcomes are not so clear cut.
For example, what happens to GDP if $2 trillion of government spending is no longer being paid to employees, contractors or other businesses for goods and services? Will the cut in regulations and taxes be enough to counterbalance that drop in GDP by fueling the needed economic growth in the private sector?
And what about tariffs on China? While this adds the risk of further above-average inflation, it reduces the risk of international dependence (at least on a potential world superpower).
In the midst of all this we have AI, which is still a question of just how much it is going to improve efficiency per worker (and thus lower long-term cost) in the economy in the years ahead.
Markets are trying to juggle and analyze all of these things and more.
The fact is, the one thing we can be sure of is that investors are hyper aware of this uncertainty. And that’s a great thing!
As that uncertainty fades in the midst of a neutral/optimistic outlook, that gives markets fuel to trend upward.
The moment we want to watch for is when markets appear to hit a peak and trend sideways to slightly down over about three months. This is how most bear markets begin. Right now, we’re not seeing that, but it’s something we should be aware of.
Those who wish to limit the downside in their portfolios might be interested in securing insurance against a market drop. How does that happen? With the use of a put option.
You can specify how much you’re willing to risk, and how much you’re willing to give up in potential rewards. Read the next section to learn more!