Investment Workshop 14: The Trump Effect

Wanderer
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Wanderer

The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.
Wanderer
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Hello again and welcome back to the Millennial Revolution Investment Workshop! New readers, please click here to start from the beginning.

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Well, hasn’t this been an interesting week.

So…what’s in the news lately?

Yeesh. What ISN’T?

Source: CBC
Source: The Globe And Mail
Source: CNN

Well, President Trump may be a lot of things, but nobody could ever accuse him of being lazy.

I don’t know about you guys, but I’ve just been buried in news article after news article dissecting and analyzing every next executive order that comes out, and all the pundits and commentators trying to figure out whether this will help America, or hurt America or bring about the end-times of the entire country, as one especially breathless journalist claimed.

And to be honest, I’ve actually been a little mystified why the stock market has been so steadily trending higher since election night. If the market hates uncertainty, than why has it been so chill?

Well, THOSE days are over…

Source: Bloomberg

Millennial Revolution is not a political blog, so we’re not looking to add yet another voice onto the incessant cacophony of wailing and screaming that is the American political process. Besides, that’s what your Facebook wall is for.

But the age of volatility is back, and with a vengeance. Where a previous administration would have made major policy changes in collaboration from congressional panels, or public town halls, and then telegraphed it with a carefully managed media campaign, this administration just does whatever the Hell it feels like and the world finds out about it in a friggin’ Tweet.

What does this mean for us? Well, in this crazy, volatile market the only investment strategy that actually makes sense is the one we’ve chosen: a globally diversified portfolio of low-cost Index ETFs.

Why?

Trump’s Policies are Pro-Business

And no, I don’t mean “HE’S A BUSINESSMAN! WOOOO!” I mean his actual tax policies are stimulative for corporations as a whole.

Specifically:

Corporate Tax Cuts (35% down to 15%)

This single change alone could cause a double-digit rise in the stock market. This is because such a drastic tax cut, in the absence of any other changes, takes money that would have gone to the government and converts it into earnings.

If market sentiment (measured as the price-to-earnings ratio) doesn’t change, this would translate directly into higher stock prices. Boom. Instant stock rally.

Corporate Income Repatriation

This one hasn’t been talked about in the mainstream media but all the CEO’s I know are excitedly chattering about this.

You see, the US is the only developed country in the world to tax money made overseas, but only if that money is repatriated, meaning brought back to the US. That means if a company makes $1B worth of sales in Asia, they can’t bring that money back to the USA to, say, hire more people or build more factories. This forces corporations to leave their money overseas and instead build factories in other countries. This, as every CEO points out, makes no sense since it prevents them from hiring US workers even though they want to.

Trump has promised a “tax holiday,” meaning a reduced or eliminated repatriation tax to allow companies to move their money back Stateside. If he does this, you can expect US companies to do this with gusto and either use that money to build factories, hire US workers, buy back their own stock, or distribute the cash as dividends to their shareholders.

All this adds up to be extremely good for the US stock market, and as a result staying invested in equities long-term makes sense.

Trump’s a Little…Unstable

President Trump has, oh let’s just say, a bit of a temper. If someone (or some company) pisses him off, he will personally bitch about it in a way that everyone hears it. Remember this?

That Tweet sent Lockheed Martin’s shares tumbling and Boeing’s going up. Presidents aren’t supposed to take a whack at individual companies like this, but here we are.

So in this environment, it makes NO sense to own individual stocks. Sure it might make sense in your head to own Disney, you know, because of Star Wars. But then what if some dude in a Daffy Duck costume at Disneyland puts a Trump wig on as a joke, he sees the picture, and then he tweets that everybody should “Stop going to the failing Disneyland. Their movies are terrible, hardly any boobs.” and tanks Disney’s stock? We have NO way of predicting what random person or company he’s going to get pissed off at next.

So the only thing that makes sense in this case is to own broadly diversified Index ETFs like the ones we use in our portfolio. Since it contains every company, it’s impossible for Trump to take any one of them down with one of his merciless tweets.

Trump’s a Builder

As a private citizen, he was a builder. And as President, that won’t change. He’s promised to build roads, oil pipelines, and, oh yeah, a wall. A $15 Billion wall on the entire Southern border with Mexico. And if you, for a brief second, set aside the racial/social quagmire of that whole thing, you’ll realize that the wall is basically a giant public works project, just like a bridge or a school.

It’s actually kind of ironic. On taxes, he’s very much a Republican in advocating such drastic tax cuts. But on infrastructure, he’s kind of a Democrat. Either way, someone’s got to actually build that wall, and those roads, and those pipelines, and all that will pump more money from the Federal government into the US economy, which is positive for US equities.

The US is Not the Only Game in Town Anymore

Trump is already starting to monkey around with trade deals. He’s killed the TPP, and he’s threatened to renegotiate NAFTA. How will this all turn out?

Beats the Hell out of me. I’m not a diplomat or an international trade lawyer.

But what I DO know is that when all the dust settles, companies will end up doing what’s the most profitable for them. If it means packing up operations from Mexico and relocating in the US, they will. If it means fleeing the US and setting up shop in Italy, they will.

Trade deals impact where companies move and what country’s workers end up getting hired. And since nobody knows how these economy-shifting trade negotiations are going to end up, we hold a globally diversified basket of Index ETFs so we won’t be hurt either way. If the trade negotiations wind up such that companies flee the US, our US ETFs will go down as the International ETFs will go up. If companies pile into the US, our International ETFs  will drop while our US ETFs swell. But our total value won’t move too much either way.

Volatility’s Back, Baby!

Well, if the past few days are any indication, we are in for a roller-coaster of a ride over the next few years. As of this writing, the DOW was down over 200 points. But our portfolio? Down less than 0.5%. Yawn. Wake me up when something interesting happens.

It’s important to know when the long-term trends are positive even when the short-term trends are negative. And here’s an easy rule to remember when it comes to Index Investing.

The long term trends are always positive. Always.

And on that note, we will now, in all this uncertainty, among all this crazy crap in the news, initiate our next buy. Because in Index Investing, the long term trends are always up. Always.

Canadian Portfolio

Here’s our current portfolio allocation after cash has been added.

Asset Ticker Unit Price Units Market Value Allocation Target Allocation
Canadian Bonds VAB $25.24 32 $807.68 32.28% 40%
Canadian Index VCN $31.21 13 $405.73 16.22% 20%
US Index VUN $41.54 9 $373.86 14.94% 20%
EAFE Index XEF $26.66 12 $319.92 12.79% 16%
Emerging Markets XEC $22.90 4 $91.60 3.66% 4%
Cash $1.00 503.39 $503.39 20.12% 0%

So now we need to make some buys to get us back on target.

Asset Ticker Target Allocation Unit Price Current Market Value Target Market Value Current Units Target Units Difference
Canadian Bonds VAB 40% $25.24 $807.68 $1,000.87 32 39.7 7.7
Canadian Index VCN 20% $31.21 $405.73 $500.44 13 16.0 3.0
US Index VUN 20% $41.54 $373.86 $500.44 9 12.0 3.0
EAFE Index XEF 16% $26.66 $319.92 $400.35 12 15.0 3.0
Emerging Markets XEC 4% $22.90 $91.60 $100.09 4 4.4 0.4
Cash 0% $1.00 $503.39 $0.00 503.39 0.0 -503.4

And finally, we do some rounding to get everyone to the integer units of ETFs, making sure we don’t go into margin.

Asset Ticker Unit Price Action Fractional Units Units Proceeds
Canadian Bonds VAB $25.24 BUY 7.7 8 $201.92
Canadian Index VCN $31.21 BUY 3.0 3 $93.63
US Index VUN $41.54 BUY 3.0 3 $124.62
EAFE Index XEF $26.66 BUY 3.0 3 $79.98
Emerging Markets XEC $22.90 BUY 0.4 0 $0.00
Total $500.15

US Portfolio

Here’s our current portfolio allocation after cash has been added.

Asset Ticker Unit Price Units Market Value Allocation Target Allocation
Bonds BND $80.94 10 $809.40 32.05% 40%
US Index VTI $117.46 5 $587.30 23.26% 30%
International Index VEU $46.01 13 $598.13 23.69% 30%
Cash $1.00 530.21 $530.21 21.00% 0%

And here are the buys necessary to get us back our target allocation.

Asset Ticker Target Allocation Unit Price Current Market Value Target Market Value Current Units Target Units Difference
Bonds BND 40% $80.94 $809.40 $1,010.02 10 12.5 2.5
US Index VTI 30% $117.46 $587.30 $757.51 5 6.4 1.4
International Index VEU 30% $46.01 $598.13 $757.51 13 16.5 3.5
Cash 0% $1.00 $530.21 $0.00 530.21 0.0 -530.2

And finally, rounding to individual numbers to stay within our cash allowance and not trigger any margin buys…

Asset Ticker Unit Price Action Fractional Units Units Proceeds
Bonds BND $80.94 BUY 2.5 3 $242.82
US Index VTI $117.46 BUY 1.4 1 $117.46
International Index VEU $46.01 BUY 3.5 3 $138.03
Total $498.31

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Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.

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37 thoughts on “Investment Workshop 14: The Trump Effect”

  1. Hi Wanderer,
    I’ve been following along and hope to sell my condo in sept to fund more time off with my miracle baby. I wonder why you chose vcn versus vfv? I also own xin and xiu and want to have a coherent portfolio to fulfill this dream. #teambaby!

    1. VCN is a Canadian equity ETF, VFV is a US equity ETF.

      Perhaps you meant VUN instead of VCN, in which case I suspect it’s down to the number of holdings. VUN holds 3,600 companies and VFV only 505. Admittedly VFV fees are lower, but VUN has more diversity.

        1. I hold VUN over VFV but Each has their own merits I suppose. The difference in fees is about 0.07%, which isn’t a lot but I guess adds up over time.

          I like more diversity personally, the S&P isn’t the most diverse index to hold, for example the top 50 companies in the S&P holds more than 50% of the entire indexes value. Far better than the Dow Jones though. For me, the more companies you can hold in an ETF, the better, hence I chose VUN.

  2. What do you think of Apple Inc.? I’ve been holding on to AAPL for a while now.

    iPhone 8 coming up in September (10-year anniversary of iPhone).
    Another supercyle on tap.
    The services business is growing very nicely.
    The latest Chinese numbers are encouraging.
    The number 8 is expected to propel the China iPhone sales even more (the Chinese view 8 as a lucky number).
    The hype is going to be astronomical.

    15%-25% upside over the next 12 months?

    (P.S. I don’t own any Apple products myself. Just the stock.)

    1. “So in this environment, it makes NO sense to own individual stocks. Sure it might make sense in your head to own Disney, you know, because of Star Wars. But then what if some dude in a Daffy Duck costume at Disneyland puts a Trump wig on as a joke, he sees the picture, and then he tweets that everybody should “Stop going to the failing Disneyland. Their movies are terrible, hardly any boobs.” and tanks Disney’s stock? We have NO way of predicting what random person or company he’s going to get pissed off at next.”

        1. Good for him, and totally up to you if you want to invest. However, the millennial revolution folks already said pretty clearly what their opinion would be on that purchase. All you need to do to answer your own question is read the post.

          Also, Warren Buffet recommends that after he dies his wife’s assets be put into index funds, for the simple reason that only Warren Buffet is Warren Buffet. If you’re impressed with his thoughts on finance, index investing is the way to go.

          1. Warren Buffet is a value investor, and he’s very good at finding undervalued/distressed companies, investing in them, and then turning them around.

            Not everyone can do that. Index investing is a strategy that anyone can do.

        2. Crescent if you want to dabble around with a few individual stocks then allocate a small % of your portfolio to gambles. No more than 5% of your portfolio should be for this though.

          You’re not Warren Buffet and putting all your eggs in one basket (especially Apple!) is very risky.

          Personally I think Apple has reached its maturity phase of their life cycle and won’t be churning out the profits we’re used to seeing for too much longer. Too many players in the market now and they offer nothing innovative these days. Don’t get me wrong they won’t be failing any time soon but I don’t see the massive growth that you do.

          1. These days it’s not about being “innovative.”

            I also have holdings in Amazon, Facebook, Netflix, Google, etc.

            It can be argued that none of these companies has come up with anything new recently. Heck, Amazon has a PE ratio of 190 (in contrast, AAPL’s is 15)!

            It is all about whether we expect these companies would continue to grow without incurring big losses. If they can do that, then it’s all good.

            1. Fair enough. You do realize you can just buy an ETF and own all of these blue chip companies though?

              The problem is you’re gambling on Apple alone and your initial comment was hopeful of short term gains over the next year. Warren Buffet does not do this, he invests long-term in highly safe blue chip companies. You can own all of these companies in an ETF.

              As I said, if you want to gamble and play around, keep it to a small % of your portfolio. Stock trading is also expensive, ETF trading is not.

      1. “Stop going to the failing Disneyland. Their movies are terrible, hardly any boobs.” and tanks Disney’s stock?”

        If people is selling DIS for such a silly reason, it would definitely be a huge buying opportunity to me.

  3. I’ll say this for him, when he issued his ban on immigration, folks stopped caterwauling about the wall and whatever else he tweeted wrong the previous week. If he keeps this up, it won’t be long before everyone will be too exhausted to do much protesting about anything else he gets up to.

  4. Volatility is not back. I agree with many of your points, but please try to be accurate. The VIX, a widely regarded volatility measure, hit nearly 13 yesterday, a low volatility level. Its 52-week range is 10.30 – 30.90. So volatility is definitely not back yet, though I would like it if it were.

    “But the age of volatility is back, and with a vengeance.”
    “in this crazy, volatile market”
    “VOLATILITY’S BACK, BABY!”

    1. Everyone seems to be losing their heads due to the recent election, but while it may “feel” like these are financially volatile times, they are not. Taking the emotion out of investing involves using numbers and math, and the best source for predicting volatility is the VIX (known as the CBOE Volatility Index, INDEXCBOE:VIX). Chart it out and feel the irrational emotions fade away…

      1. Huh. Great point, I hadn’t checked the VIX, and in fact the market then recovered the next day. Strange.

        Still, my point still stands which is to ignore big scary day-to-day price movements and execute your investment strategy.

  5. I don’t know what to make of Trump and the market. On the one hand less regulation and lower taxes mean better profit-making environment. Stimulative spending on the military, new oil pipelines, and The Wall (and maybe some sorely needed civil infrastructure projects like mass transit, bridges, sewer/water systems, roads, and rail lines) means a nationwide construction boom.

    On the other it’s like we gave a five year old with Tourette’s syndrome a smartphone with a twitter account (and the nuclear launch codes) and he’s not shy about thumping his little chest to the world. Maybe it’s all talk and posturing or maybe he’s off like the half eaten cottage cheese still sitting in my fridge from two months ago.

    In any event I’m doing a whole lot of nothing. Last week I moved $50,000 from stocks into my first bond holding ever just because “the markets are way up and I promised myself I’d take a little profit if that happened”. Not really a Trump-centric investing decision but rather one to pull a little off the table (now I’m down to a 94%/6% stock/bond-cash allocation).

    In the meantime we’re going outside to play and enjoy the nice weather here in NC while it lasts (ask FIRECracker to see the pic I just sent her to gloat about our awesome weather 🙂 ).

      1. Def. a split personality in our weather. Freezing cold one week and bright and sunny and warm the next. We’re halfway between your frozen arctic and the tropical warmth of the Caribbean so when the weather systems move through we can get a piece of the arctic action or if the warm fronts push north we get that.

        It’s even crazier where we’ll have a solid snowstorm with ice. Freezing temps, sheets of ice everywhere. Then 24 hours later it might be 70 degrees (21C in the system the rest of the world uses) sunny and we’re outside laughing at the ice as it melts.

        Which is awesome because all you have to do is wait out crappy cold weather and soon you’ll have decent temps. We are back to overnight lows below freezing but next week it’s in the 70’s again (20’s I guess you would say).

  6. “Since it contains every company, it’s impossible for Trump to take any one of them down with one of his merciless tweets.”
    Haha good one lol.

    One thing you didn’t take into account and it does matter a bit I think: How long will he actually last?
    I doubt he’ll last 4 years, but that’s just me …

  7. Personal Capital Issues: “Thank you for your patience while we investigated your issue with Questrade, which is a non-US financial institution. Right now, our business is solely focused on the US, and we don’t currently support account aggregation for banks outside the US”

    Anyone else having issues connecting their Questrade accts with PC?

    1. Yes. Personal Capital simply does not support Questrade and most Canadian banks, according to a PC rep. Not sure why this blog keeps posting those links for Canadians.

  8. Is there any way to avoid having to do this semi-monthly chore of figuring out exactly how much of each fund to buy? Not that I mind – it’s kinda fun, at first. But there must be an app or something out there that I can just give my desired allocation to and it will do these calculations and execute the buys for me… ?

  9. Love this article!! Even though I invest in broad-index ETFs, the volatility still gets to me. I’d rather invest the day when the dow is down 200 versus up 200, but I guess at the end of the day it doesn’t matter in the long term. Now with Trump predicting things will be even harder cuz who knows what he’ll sign today or tmr that could either lift or destroy the market. Ugh

  10. Hey Wanderer –

    Long time reader, first time commenter – love what you two are doing here. I was wondering if you could perhaps share the spreadsheet you mentioned a comment or two above mine for crunching the re-balancing numbers?

      1. Wonderful!

        Thanks bunches – maybe it could be part of the tools posted at the bottom of the series? I can’t be the only one who’d find it useful.

  11. I respectfully disagree – I think it it makes perfect sense to own individual stocks, if you do it right. I own Lockheed stock and even though it took a minor dip it rose back up and is now at an all-time high. I am a huge fan of index funds and that is where the majority of my money is invested. But individual stocks can still make up a decent portion of your portfolio if you do your research and buy in at a reasonable price. I believe the same strategy should be used in relation for stocks index funds – just buy and hold; let time and compound interest do its work. I just feel people like JL Collins can be a bit misleading when he claims that ‘you can’t pick winning stocks’ when many of your average investors can. You don’t have to be Warren Buffet or Benjamin Graham, but you can take some of the principles they teach along with methods of current day stock investors such as Jim Cramer and make a solid return going this route. Just a thought, that’s all!

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