Road to retirement: Should you worry about trade war?

It seems like every day now we hear more saber rattling from the U.S. and China about a trade war. The U.S., of course, lobbed the first cannonball earlier this summer, and the Chinese are just responding.

While this is all in the hands of politicians, should you be worried about how it might impact your retirement savings? I wouldn’t be any more concerned about a trade war than you are about the other 100 risks that could derail the markets, from massive deficits to inflation to a real war.

The bottom line is a number of economic or financial risks could trigger a 30 percent to 50 percent decline in the global stock markets, so I’d just always be prepared for that risk profile. It really doesn’t matter what triggers it. The reality is you have no way of predicting which of the “straws” could break the camel’s back. So don’t try to predict, just have a basic plan in place when something does cause the decline.

If we look at the reality of a trade war, the bottom line is the “war” will end when enough pain is inflicted on both sides. Neither the U.S. nor China really has the ability to defeat the other, they each basically have the ability to make it more uncomfortable for the other. Then, at some point, cooler heads will prevail and we’ll be back to normal. Maybe it takes one month, one year, or five years, who knows?

While the trade skirmish is underway, business will continue, companies will figure out ways to work around some of this, and I’d keep investing right through it. By way of example, one of the largest U.S. technology companies magically found many of its products exempt from the big tariffs on goods shipped from China, where many of this company’s products are manufactured. Right or wrong, the bottom line is companies and interest groups have armies of lobbyists who can craft special deals. Trying to predict what industries will be hurt and by how much is guesswork.

Here’s another example. Farmers are being hurt by the tariffs China imposed on U.S. agricultural goods sold in China. But farmers are receiving billions in support from Washington to help offset the lost sales to China. I expect farmers would rather have access to global markets than government support, but that’s the course our politicians have chosen.

The entire tariff process is fraught with political infighting and business lobbying, which means it is entirely unpredictable. I wouldn’t make investment decisions based on what you or anyone else thinks will happen with a trade war. Companies source products and parts from all over the world, so there is no clear method of assessing how tariffs will impact many companies. And again, companies will also do their best to work around the tariffs. Plus, if the market does take a downturn because of the tariff issues, the minute investors think the trade war is over, it’s likely to bounce back fast. Trying to time all that is likely a losing strategy.

The better bet as an investor is to focus on the basics of risk management. Again, the trade war in terms of its risk profile is really no different than any other number of risks that can negatively impact stock market val ues. There is no way to accurately gauge the risk, all you can do is make rough estimates. And when investors get scared, markets can move down anywhere from 30 percent to 50 percent. Factor that into your strategy and then invest accordingly.

If you are young and still working, I wouldn’t get too defensive with my portfolio. Have enough in savings for an emergency fund and then the bulk of what you are saving for retirement should go into diversified stocks. The diversification is an important point. With the random nature of tariffs, if you are too concentrated in a few holdings or a few market sectors, you can get hurt more than the average investor if the tariff issue impacts your holdings more than others. So check to see that you are adequately diversified across market sectors.

But if you are nearing retirement or in retirement, you’ve got to consider how you’d generate distributions if the market turns negative. I’ve mentioned this in prior columns, but I’d have a plan for at least five years of bad markets. What I mean by that is I’d want to take distributions from investment holdings that are not directly impacted by stock market declines. The simplest approach is to use things like CDS or Treasury bonds.

If stock prices are down, the worst thing to do is sell to meet your spending needs. You are selling into losses, and your retirement plan can evaporate pretty quickly. But once you’ve got your plan for distributions, then I’d consider investing the rest in stocks. Most people will have a long retirement in front of them, and the money will need to grow. With bond yields still around 3 percent, that’s not much to live off. Even if stocks only do 6 percent going forward, it’s still double the bond market. You just need a strategy to manage the volatility.

Charlie Farrell is a CEO of Northstar Investment Advisors LLC, and guides the firm’s investment philosophy. He is the author of “Your Money Ratios: 8 Simple Tools for Financial Security.” This article is for information and education purposes only. It does not constitute investment, tax or legal advice.