Successful Investing Takes Tolerating Uncertainty
Sweeping tariffs against the United States' three biggest trading partners are scheduled to go into effect tomorrow (or perhaps not).
In a series of stutter steps, tariffs have been alternately paused on some goods while increasing on others. U.S. markets responded by dropping sharply for the first time in two years. Markets hate uncertainty.
The latest round of tariffs is an example of the many disruptive forces that the market—and, by extension, your personal finances—may face. This time around it happens to be a new government administration using one of its tools of industrial policy. However, disruption and uncertainty could come from any direction. It could come from relatively predictable federal interest rate movements, for instance, or unexpected events like the COVID pandemic, or one of the world’s biggest ships blocking global trade through the Suez Canal for a week.
What History Can Teach Us
History of Tariffs
Let’s look for a moment at the history of tariffs in the U.S. Over the last two centuries, the country has only seen a few instances of tariffs on par with the latest round from the Trump Administration.
Take the Smoot-Hawley Tariff Act of 1930. It was enacted during the early years of the Great Depression and designed to protect American farmers and manufacturers from foreign competition by raising import tariffs on a wide range of goods. The effects of these tariffs are widely considered to have been disastrous. Canada and European countries retaliated with their own tariffs, global trade fell and the U.S. experienced a period of deflation.
On the other hand, the first Trump Administration’s 2018 tariffs didn’t have the same impact, though neither did they have their intended effect of reducing the trade imbalance. In fact, imports from Mexico increased 63%.
What’s more important than the relatively short-term effects of these tariffs is that throughout this entire period, the market has been steadily on the rise.
This is despite the fact that many disruptive events took place during the same period, including World War II, 1970s stagflation, 9/11 and the Great Recession, to name a few.
Downturns Don't Mean Down Years
A key takeaway is that markets frequently experience all sorts of disruptive events that create significant declines, yet markets most frequently end the year in positive territory.
This chart below illustrates the U.S. market's year-by-year gains and declines since 2004. Positive calendar year returns are illustrated in blue. Negative calendar year returns are in yellow. The largest declines during the year (intra-year) are in red.
Performance during the year (intra-year) has varied widely, with a low of -49% during 2008 and a high of -3% during 2017. Yet, returns ended the year positive in 17 of the last 20 years (ending 2023).
Past performance is no guarantee of future results.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. In USD. Data is calculated off rounded daily returns. U.S. market is represented by the Russell 3000 Index. Largest intrayear decline refers to the largest market decrease from peak to trough during the year. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. Image provided by Dimensional Fund Advisors LP.
Markets frequently experience temporary declines before recovering and moving higher.
Most years have at least one significant downturn, but that doesn’t necessarily mean a bad year overall.
A striking example is 2020, where the market saw a dramatic plunge during the COVID-19 crisis, only to rebound sharply and finish the year with strong gains. This highlights why long-term investors must look past short-term volatility—staying invested through uncertainty is often rewarded. Even years with double-digit intra-year declines can still produce positive annual returns, reinforcing the idea that patience, portfolio structure, and long-term discipline are critical in investing.
Our Next Steps
This is not to say that disruptive events won’t have an impact on your life; they almost certainly will.
It’s possible, for instance, that the latest round of tariffs could have a direct impact on your wallet if they push prices higher. This could be a drag on your finances, especially for those on a fixed income. A closer look at your budget and spending may be warranted with our automated tools at www.openwindowFS.com/plan.
Still, when it comes to your investment portfolio, it should be designed with these disruptive events in mind. You must— not might— get through them. As a result, with the right portfolio structure, you’re already prepared to deal with disruptive forces. When they happen, you may feel the need to snap into action. That would be a totally natural response that our nervous systems have graced us with. But in fact, those with the right portfolio structure have already done something to address them. If we’ve worked together to create an investment plan that’s structured for tax efficiency and allocates your assets according to your need, willingness, and ability to take on risk, then you're very likely already in a favorable position to confront uncertainty.
Proper diversification and disciplined rebalancing can help you seek better risk-adjusted, long-term returns no matter the economic backdrop and what the future holds.
Of course, disruptions are, by nature, jarring. So, if you have any questions about what’s going on in the news, markets, or economy, or want to ensure that you're pursuing the right portfolio structure, please reach out anytime at (775) 827-0670 or schedule a Quick Connection time at www.openwindowFS.com/connection.