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I try to avoid talking about politics on this blog, because a) There is no shortage of people discussing politics on the Internet and b) It keeps attracting crypto bros to the comments section, and nobody wants that.
But sometimes, the topics of politics and finance become intertwined, and I HAVE to talk about it. So, here we go…
My initial reaction to the election was to simply do nothing, and that’s turned out to be the right move. Stock markets didn’t collapse, and instead trended upwards since Nov 5, and those that panicked and moved to cash will now be forced to buy back into the markets at a higher price. But now that we’ve all had time to digest this election result and the possible policies that Trump may enact, what (if any) changes to our investments are we planning on making?
The Case for Diversification
This week, the news on the economic front has been dire, all due to the incoming president promising a whopping 25% tariff on all goods coming in from Canada and Mexico.
President-elect Donald Trump on Monday promised massive hikes in tariffs on goods coming from Mexico, Canada and China starting on the first day of his administration, a policy that could sharply increase costs for American businesses and consumers.
Trump ups the ante on tariffs, vowing massive taxes on goods from Mexico, Canada and China on Day 1, CNN
Canada, Mexico, and the US economies are all deeply interconnected, and all three of us trade heavily with each other for everything from avocados to cars to oil. So even minor changes in our cross-country trading relationships have profound ripple effects on our economies.
As anyone who’s ever bought something and had it shipped from another country knows, tariffs are paid by the buyer, not the seller. So tariffs imposed on imports coming into the US will be paid by US companies, which get passed onto consumers. This causes everything that you buy at the grocery store, online, or at your local Walmart to go up in price.
That’s the direct effect. The indirect effect is that when a country imposes tariffs on another, the targeted country tends to impose retaliatory tariffs going the other way.
All that means inflation, which all three countries just spend the last 4 years wrestling back into control, is going to come rearing its ugly head again.
And that’s just tariffs. The other major Trump policy proposal that could roil the American economy is the promise to conduct mass deportations of all illegal immigrants.
As much as illegal immigrants make convenient punching bags, the US economy depends on them to function. These people work jobs that citizens are unwilling to work in, such as waiting tables, harvesting crops, and working in factories. It’s estimated that nearly 50% of the agricultural work force is composed of undocumented workers.
Take that away, and all of a sudden, you have to pay much higher wages to attract “legal” workers, and as a result groceries are going to shoot up in cost as well.
More inflation.
So all this sounds bad, but should we be eliminating our US exposure and moving all to cash to avoid the inevitable market crash?
Of course not.
First of all, there’s a big difference between a campaign promise and actual results. Trump, in particular, has been known to use big scary threats as a negotiation tactic. Last time he was in power, he promised to build a wall and make Mexico pay for it. He ended up building a few sections of the wall, and Mexico didn’t pay for any of it. He threatened to raise tariffs in the run-up to renegotiating NAFTA. The resulting USMCA trade deal ended up being largely the same, with some minor tweaks on immigration enforcement. He also threatened to pull out of NATO unless other countries started contributing more towards their defence budgets. That resulted in other countries stepping up.
The point is, Trump’s big scary threats rarely become policy. Now obviously, I don’t know what’s going on in Trump’s head, but I do know that deliberately crashing Canada, US, and Mexico’s economies benefits nobody.
And secondly, this is the situation where having a globally diversified portfolio comes in really handy. An all-in bet on any one country is vulnerable to geopolitical events like this, and the only effective way to hedge against it is to bet on the entire world’s developed economies at once. If the US is truly intent on blowing up their own economy, then all that idle trading volume has to go somewhere, and other countries will end up picking up the slack.
So by keeping a globally diversified allocation where international markets are well represented, and diligently rebalancing even as stock markets gyrate, your portfolio will survive just fine.
Keep Expenses Below Dividends
Another big advantage of having globally diversified holdings is your portfolio will have a higher dividend yield.
The US stock market has always been a growth-oriented stock market, where most of the gains are returned to investors in the form of capital growth. As a result, VTI, which is the Vanguard Total Stock Market ETF we use to track US stocks pays a meagre 1.2%. If we based our entire portfolio just on that, we’d be really nervous right now.
Thank goodness we don’t. Ever since we retired, income has become much more important to us than capital value, which is why we use our “Yield Shield” strategy, which uses alternative assets such as Preferred Shares and international equities to get a higher dividend yield.
So the first thing we did after the election results became clear is I double checked our portfolio’s yield, FIRECracker double checked our spending projections, and we made sure that our living expenses can be completely covered by our dividends if stock markets end up tumbling in the near future.
That’s why our portfolio is truly an all-weather portfolio. It goes up when markets go up, and it keeps paying our bills when markets go down.
Keep Buying As The Markets Plummet
Now, you might be thinking, well all that sounds fine for you, mister retired millionaire. But what about me, a person trying to save and invest towards FIRE?
And to those people, I’d just like to say: I’ve been there.
When we started investing, it was right before the Great Financial Crisis of 2008. And let me tell you, it was not fun. Stock markets were dropping so fast that I would put in $1000 into my portfolio, only to see my portfolio value drop by $1000 the next day. It felt awful, like setting my money on fire.
In hindsight, that turned out to be the exact right thing to do. Because by doing that, I was buying more units as prices fell, essentially picking them up on sale. When the rebound happened, my higher exposure allowed me to benefit from the uptick stronger than the downturn, and I ended up recovering my money faster than the overall market.
So keep your finger off the sell button, and hold it over the buy button instead. It’ll be the most uncomfortable feeling in the world, but it’s the right thing to do.
Remember, anyone can be a good investor when markets are going up. You find out who the really good ones are when the markets are going down.
Hope For the Best, Prepare for the Worst
The thing about writing about politics is that half of you might be in the same boat as I am, scared that another market crash is about to happen. And the other half probably think I’m crazy, thinking that Trump getting elected is going to make stock markets shoot up to the moon.
To the readers that think that, I sincerely hope that you’re right. I would love for Trump’s policies to cause stock markets to shoot upwards to the moon. That’s why I’m committed to remaining fully invested.
But if they don’t, I’m happy to report that we (and other early retirees that follow us) will be just fine.
How about you? Are you planning to make any portfolio changes now that Trump’s been elected? Let’s hear it in the comments below!
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What about all the big US multinationals in Canada like Walmart, McD’s, Coke, and a thousand others? Is their power going to let Trump destroy their cross-border businesses?
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A lot of generalities and few specifics in this post.
By “globally diversified holdings,” what exactly are you talking about? Which ETFs?
By “Preferred Shares and international equities,” what exactly are you talking about? Which ETFs? Which stocks?
You’ve been here for some time. You know which ETFs. Don’t play innocent, mmmkay?
good post, maybe you could have described the “yield shield” concept a bit before linking to it?
also, just acknowledge trump is a moron and will damage the global economy in some way, thanks to usa institutional inertia we made it through trump 1 ok, i suppose but plenty of trouble is possible in the next 50 months. hopefully 2026 mid term elections will weaken trump further.
As someone who is looking to retire in the next few years and most of our savings is in a company based defined contribution RRSP I am particularly worried. If our investments start to drop (like 2008) it will mean working for a few more years to get back up to our “magic number” I am more worried than Trump’s first time around because of the control of the House and Senate.
I wish I was as big as a moron as Trump so I’d have a 1 billion dollars in NW.
Completely agree! Fear is never a good advisor.
I’m FIRE for four years now, and—just like you—I’ve invested through both good years and bad. Honestly, I had the most fun buying during the bad years, when the specialised press and financial “experts” were busy predicting the end of the world. That “I just beat the system” thrill is something I’ll actually miss in the next crash!
As for this team? I doubt they’ll kill the economy. The climate and women’s rights? Different story (and different blog)!
Another development for Canadian investors is currency fluctuations. The CAD was already weak this year but dropped to 70 or 71 cents since the election and tarriff announcement. Bad news for Canadians who want to vacation down south, but good news for Canadian investors who hold US assets and want to retire in Canada – they suddenly have more loonies to play with. You probably noticed that your VTI holdings are much higher when exchanged to CAD, even after accounting for the recent rise in the US stock market. The same is true for anyone who holds Canadian-domiciled versions of the US total stock market or S&P 500 (VUN, VFV). Those funds are up 34% YTD while the S&P 500 is up 27%. Of course, the CAD could always go back up and our portfolios could shrink, but then Canadians would have greater purchasing power when traveling. So it’s kind of win-win for Canadians to hold US assets? Would love to hear your thoughts! I think the euro is going through a similar decline….
Key Points from Motley Fool:
The S&P 500 has achieved an average compound annual growth rate of 9.8% under Democratic presidents and 6% under Republican presidents since 1957.
The S&P 500 has achieved a median compound annual growth rate of 8.9% under Democratic presidents and 10.2% under Republican presidents since 1957.
The S&P 500 returned 1,920% over the last 30 years, compounding at 10.5% annually, and investors can expect similar results in the long run regardless of who sits in the Oval Office.
My thought is unless you are a stock picker, just stay invested and buy any major dips. Some sectors (maybe Solar, EV and the like) take a hit whereas Crypto and others go up.
I am not very fond of Trump or his policies, but I recognize that in the short term the value of my portfolio has gone up dramatically after the election of Trump. Policies implemented by a president are there to help him to achieve his goals, which are usually straightforward, but noone can see all the rammifications and unintended consequences of the policy. So the only thing one can do is to hope for the best and get ready for the worst.
I’m going to move to Taiwan and keep my investments from work in place–hey, wait! I already did all that in 2009!
🙂
Dan V
Taipei
We love Taiwan so much that we became permanent residents in 2023 thanks to the Gold Card. Hope our path would cross in Taipei!
I rebalanced a bit in November. I think investors are too optimistic. Moving a bit into bonds helps me sleep better. Although, it wouldn’t make a big difference in the long run. I only moved 5% from stocks to bonds.
This month, we crossed another incredible financial milestone: our portfolio value has crossed another million $ in value since we stopped working and started traveling the world in 2018! What’s even more amazing? We didn’t need to do much—just stayed consistent, lived below our means, and let our money work in the market. It’s incredible to witness the power of patience and disciplined investing in action. 🚀
Now Mrs. NN and myself need to up our spending if we don’t want to die with way too much money on our bank account 🙂
While I don’t advocate living below my means, I’m all for living within my means. Right now, that would be pulling 4% from my portfolio. I’m even open to the idea of going to a 5% SWR.
I’m curious to know what your idea of upping your spending looks like. Would you be willing to elaborate on what that would be?
When the USA gets a cold, other countries get pneumonia and some even ‘die’. Canada and the USA are not trading equals. Canada needs trade with the USA to survive and the USA would be totally unharmed (after a modest transition period). I’ve spent 50 years interacting with foreigners from every corner of the earth and quite a few have not ‘understood’ this fact.
Any non USA person should have at least half their wealth in USD and in banking institutions outside their home country. This includes Canada. It’s likely that Trump will get distracted by other events and forget about Canada OR Canada will comply with whatever Trump wants. But there is a non zero probability that Canada becomes unsafe for USA investment and trade. And this would devistate Canada and the value of everything Canadian. A persistent trade tariff will cost Canada a million direct jobs and likely 3x when cascade effects are added in. Unemployment, lower tax collections, retail collapse, housing values collapse, banks fail, and on and on… Canada can’t print money and do without dollar denominated imports in a collapse. It’s economy is just too small.
My point is simply that mutual 25% tariffs impact the USA and Canada differently. For the USA, it might be a 0.5% economic hit (probably less because of substitution). Canada’s tiny $2 trillion GDP can’t take a 10% or 20% economic hit (think $200 to $400 billion). There are no markets for Canadian products that can’t be exported to the USA.
Trump is an indication of a changing world. It’s only going to get worse in a world of AI and robots. Please act rationally and protect some portion of your wealth from bad things that might happen to your home country.
Ok Doomer,
How would you like non-Americans to have half their wealth in a financial institution outside their home country? Is that even possible for most, if not all, people out there?
People already in many cases hold their money in multiple financial institutions in the their own country and the wise thing to do in almost all cases is to consolidate their holdings in one place for ease of management and administration.
And you instead want people to do the opposite to the point of holding funds in multiple countries?
That sounds to the point of ridiculous and stupid.
The easy solution is below:
Buy ETFs in your home country (on the caveat that it is democratic, has strong institutions, rule of law and judiciary), that represent the US, developed nations, emerging markets, bonds/treasuries, preferred shares. Hedge some to home country and others remain unhedged.
Do you even invest and are you even aware of the complexities that arise in holding assets in multiple country jurisdictions?
Tariffs, AI, robots, etc., and all your other doomer stuff doesn’t change anything regarding investing and financial independence.
Dave:
You could ask about my qualifications in a nicer manner. You can search for my name on Linkedin. I’m a USA citizen and also an Irish citizen. I’ve spent decades in corporate finance in the world’s largest corporations. I founded an international software company and have done enough investing over the last 50 years that I have been successfully retired for about 25 years. I’m qualified. I also can point to some technology expertise as well.
I had a ski instructor from Argentina. One morning he woke up and found that his dollar accounts were forced converted to pesos and one minute later the peso was hugely devalued. I knew people in Iran in the 1970s living a modern western life and lost everything a few years later. Europe in the last 100 years has had pretty severe economic issues including persistent problems in Mediterranean countries. Many parts of Asia have also had their ups and downs. The Canadian Dollar was at parity with USD in the early 1950s and by 2002 it had lost 1/3rd of its value.
I don’t know a single rich person in Europe that doesn’t have substantial assets in USD AND outside their home country. Are all these people stupid? My guess is that a USA market index held in USD would have outperformed 90% of the countries in the UN over the last 40 years. So that’s a good first step. In bad countries and even some good countries, high inflation or currency devaluation is highly likely in any 20 year period. Do you really want to bet that this can’t happen in your country? Even Canada is now known for sudden freezing of bank accounts.
Finally, technology acceleration is happening. Don’t believe me, just look at the market cap of the top 20 tech companies … worth about $20 Trillion! These companies are driving technology change that improves productivity at all levels. More output with less labor means fewer jobs. The richest and smartest people in the world have made their bets. Why do you think they are wrong?
You are entitled to your feelings and opinions. You need to recognize these are not aligned with the rich and smart folks. Bad stuff happens in many countries over a lifetime. Your future success depends on understanding this.
You fail to understand that I am wealthy (rich is a term for wannabes) and smart. Pointing out your paranoia doesn’t make me rude since you ask me to use a nicer manner. You think my manner isn’t nice because I don’t agree with the points you make. That has nothing to do with being nice or not nice. Either you can hold your side of a debate or, your position held is weak, and you just can’t. Can’t seems to be what has occurred here.
If you want to bring up risk and risk mitigation, why not look at the US debt and deficit. That is something to be concerned about.
It doesn’t stop me from investing part of my investment portfolio on US indices though. All done from a Canadian brokerage account.
If a country is democratic, follows the rule of law, has strong independent institutions and judiciary, there are no concerns.
You quote 3rd world countries like Argentina. Argentina is an unstable country. Buddy, you’re on a Canadian blog. Canada is not an Argentina by a long shot. Neither are the countries in the EU nor any other developed nation. That’s why they’re called “developed”.
As for freezing bank accounts, you didn’t ask me about my creds. Working at some of the highest levels in the big 6 banks, freezing bank accounts with appropriate court orders or by our Canadian Revenue Agency is perfectly fine. And probably a shock to you, also occurs quite regularly in your vaunted US of A financial institutions as well. That you quote something relating to the Canadian Convoy Protests is laughable. Freezing accounts can occur regarding child support/alimony arrears, income taxes owing in arrears, countering money laundering, terrorist financing, and so on. The trucker convoy involved issues of money laundering and terrorist financing and therefore freezing accounts was in line.
Having a balanced and globally diversified portfolio of ETFs is all you need to counter most of your points when it comes to developed nation countries. For other countries in the developing countries category (aka 3rd worked countries), well, that’s a crapshoot.
Again, you didn’t answer my question on how you expect people to open bank accounts in countries where they don’t have residence. You don’t just show up in a foreign country (especially not a developed nation) and just go into a bank to open a bank or investment account.
By all means, enlighten us. Tell us again how it ain’t so.
Don’t worry about my future success. Answer the question instead. That, would show a nice manner.
Dave:
Thanks for the reply, I’m enjoying the discussion.
Now that we have introduced ourselves to each other, we can continue the discussion focused on a few of the points that seem to repeat.
[1] We both seem to agree that some portion of a non USA persons wealth should be in USA equities. If no other choice is available, then we both agree that a local country fund (probably with an excessive fee) that mimics a USA index would be a good step. But this step is a half measure because it doesn’t insulate against corrupt actions in the home country.
[2] Opening bank accounts in other countries are not hard. Mossack Fonseca was the poster child for showing how frequently this was done. Alcogal (Panama), Morgan & Morgan (Panama), OIL (part of Vistra) based in Hong Kong are all examples of currently available resources.
In the USA, it is pretty common for offshore persons and entities to set up a Wyoming LLC with a local nominee. Get an EIN and there is no barrier to a us bank account or brokerage account. Still have to report and pay taxes but the money is out of reach of the home country.
[3] The USA is a ‘special’ low risk different from virtually all other countries because [a] it is invasion proof, [b] all debt is in USD which can always be printed, and [c] an economy that is 80% internal and of a size that dwarfs all other countries. The USA can definitely have inflation but collapse is structurally unlikely because of a lack of dependence on exports and the adaptability of it’s economic system.
[4] I do understand that this is a Canadian blog. I made my initial comment for that reason. Saving in Canada is inherently more risky than in the USA. You tell me that Canada isn’t like other countries without responding to my specific comment about Canada losing 1/3rd of it’s purchasing power in the late 20th century. And my comment that a $100B trade deficit that becomes radically less (even zero) will create huge economic instability to a $2 Trillion economy (at best). Canada isn’t different.
[5] Other countries like the southern EU countries have been broken and on life support from the northern EU countries for decades. And the wheels are coming off Germany… cost of living is high, energy is high, defense expenditures are skyrocketing and factories are downsizing in size (think VW). Most of the ‘developed nations’ have per capita incomes around the size of the state of Mississippi (#50 in the USA). Not very developed.
===
OK, I won’t worry about your economic future. And based on your economic circumstances, you likely will be fine.
But others maybe not so much. First, the mean income for the top quintile for Canadians is about half the top for the same quintile in the USA. So the odds are already stacked against the average very good earner in Canada. Country risk and economic shocks will have a disproportionate impact on top Canadian earners who are wholly invested in Canada securities and in holding near 100% CAD. People in non USA countries have far greater risk and they can offset a meaningful amount of risk by investing a substantial portion of their savings in the USA economy and in USD. And anyone above the median top quintile should significant assets outside the reach of their country. Thus the reason for my comments.
Clearly we have a difference of opinion but I seem to have history on my side.
CAD was at parity with USD as recently as 2013 and has lost 1/3 of its value since