Donald Trump Takes a Stand on 401(k) Investments

Head in the Sand - Trump 401k

GOP presidential nominee Donald Trump has had one of the most hectic campaigns in recent memory. He has made so many newsworthy remarks that it is hard to keep up. One day last week was particularly impressive as he made over 10 news-making assertions in under 24 hours. These included initially refusing to endorse House Speaker Paul Ryan, doubling down on his feud with Gold Star parents Khizr and Ghazala Khan and predicting that the election will be rigged. (For more, see: The Conflicts of Interest Around 401(k)s.)

Whether you support him or not, simply finding the time in the day to make all those remarks (and more) is impressive. But there was one opinion in particular that caught our eye, via CBS’s Sopan Deb. Trump made the below statements during an interview with FOX Business Network’s Stuart Varney:

Varney: For the the small investor, the average guy, right now, would you say, yes, put your 401(k) money into stocks?

Trump: No, I don’t like a lot of things that I see. I don’t like a lot of the signs that I’m seeing. I don’t like what’s happening with immigration policies. I don’t like the fact that we’re moving tremendous numbers of people from Syria are coming into this country and we don’t even know it. Thousands of people, thousands and thousands of people. There’s so many things that I just don’t like what I’m seeing. I don’t like what I’m seeing at all. Look, interest rates are artificially low. If interest rates ever seek a natural level, which obviously would be much higher than they are right now, you have some very scary scenarios out there. The only reason the stock market is where it is—is because you get free money.

Trump’s Approach

Even if you are his number one fan, please don’t hire Donald Trump to manage your 401(k). First of all, setting aside the economic truth of what Trump is saying and whether his fears will ultimately influence the market as much as he thinks, every factor that he mentions in his response is short-term. As Trump is 70 years old, focusing on what’s coming immediately down the line is understandable. But most investors have longer to go until retirement and therefore need to be invested in the stock market’s long-term gains, particularly those investors without Trump’s level of wealth. (For more, see: Why Playing It Safe Could Hurt Your Retirement.)

As Bloomberg points out, Trump’s strategy basically amounts to timing the market. We believe that in the long run, due to the efficient market hypothesis, you can’t beat the returns of the market through individual stock selection and market timing. Therefore, the safest thing to do is to stick with the market, while of course monitoring constantly and rebalancing.

Trump’s approach could be a recipe for long-term disaster. Fidelity Investments has compared how investors who pulled out of the market near its bottom in 2008-09 fared versus those who stayed. Those investors who stuck with the market ended 2015 $82,000 richer than those who withdrew, on average. (For related reading, see: Why Investors Can Be Their Own Worst Enemy.)

So even if Trump is completely correct, it is not a good strategy for a long-term retirement saver, which is the demographic he was asked about. If Donald Trump applied his advice to your 401(k), you’d probably do worse than if you ignored him, even in the case of a market correction.

Asked about alternatives to the stock market, Trump would likely point to real estate (we wrote about that here), which is where most of his dealings have been. The answer is somewhere in between a diversified portfolio with investments in real estate (if you can afford it), but also stocks, bonds, the money market, etc. If a market correction really is coming as Trump predicts, then the best hedge against it isn’t to pull all your money out of equities. Rather, for most savers, we think the best protections are a long-term financial plan and a diversified portfolio, both of which account for short-term market volatility.

This article was originally published on Investopedia.com

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Donald Trump and the Benefit of Financial Foresight

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Donald Trump’s current net worth – as he would be the first to tell you – is estimated to be between $2 and $4 billion, most of which he made through inheritance and real estate investments, along with other business dealings. An article in National Journal recently took a look at what might have happened if he had invested in an S&P 500 index fund back in 1982 when his inherited real estate fortune was estimated to be worth “only” $200 million.  According to National Journal’s calculations, if he’d invested carefully in index funds, Trump’s net worth would be a whopping $8 billion today.

Does this mean Donald Trump is a bad investor? Not necessarily: the oldest lesson on Wall Street is that everything is easy in hindsight.

While highly speculative, those numbers do highlight the ongoing debate over which is a better investment – real estate instruments or stocks. Both stocks have and the real estate market have had great runs in recent history and, depending on when you invested, you could make cases for both investments being the better choice.

But the stock market and the real estate market both experience volatility, dips, and extended recovery times so, for the average investor, a portfolio composed of mainly real estate or other fixed assets (like art or collectibles, for instance) poses some risks that should be hedged with proper cash flow planning, a diversified portfolio, and proper tax planning.

Cash Flow Planning

A good financial plan takes into account how much cash you need access to, or may need access to in the future. Cash flow planning should be a key factor in deciding whether real estate investments are part your individualized financial strategy.

As National Journal points out, Trump claims he is willing to spend upwards of $1 billion of his own money to fund his presidential campaign, yet his financial disclosure statements show that he may have less than $200 million in cash, stocks, and bonds. The rest of his fortune is tied up in real estate investments, which could be much harder to liquidate and use for his campaign.

Most of us aren’t running for president but, if something like the 2007 housing collapse were to happen again, any investor who is predominantly invested in real estate could have problems liquidating those – diminished – assets for retirement, college funding, or other non-presidential goals.

A solution: diversification.

Diversification

Whether you are investing in real estate or the stock market, diversification is always a prudent way to address your own risk tolerance and use proper foresight in creating a winning strategy.

While with real estate funds, diversification can be achieved via many factors, including residential vs commercial investments, differing location focuses, and differing interest rates and financing mechanisms, it is still fundamentally one sector, subject to sentiment and swings.

With the stock market, on the other hand, diversification allows you the opportunity to invest not only in different asset classes, such as stocks, bonds, and money market funds, but in a variety of sectors and industries as well. Over the past 60 years, historically, the stock market has averaged an 8% annual return, so investors with strategically balanced and diversified portfolios, there is the opportunity for steady, while not spectacular gains, with the potential for less risk than investing only in the real estate market.

An investor who is properly diversified through multiple asset classes – including real estate if it makes sense for their own customized strategy – is potentially better protected against the short term results of one asset class experiencing a crash or a prolonged dip.

Taxes

Another thing to consider is that options for investing in real estate in IRAs and other tax-deferred accounts are complicated and not every custodian will allow you to include real estate investments in a tax-deferred account.

Hindsight vs Foresight

While Donald Trump is an outlier because his high net worth shelters him from some of the issues with primarily being invested in real estate, it’s intriguing to consider “what if.”

In the case of a more typical investor, a little foresight can go a long way in making sure you are on your way to achieving your own financial goals. A sound financial plan should be tailored to individual goals and cash flow needs, with a customized cash flow plan, and diversified across multiple asset classes for the potential for steady and compounded growth over time.

Whether you are a Donald Trump with a large inheritance or a young professional just getting started, a solid plan and strategy puts the benefit of hindsight where it belongs: in a conversation over coffee or cocktails, and not as the basis for a winning investment strategy.