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By Christopher Davis | 12-05-2016

Morningstar Minute: Investing in the time of Trump

Investors have decided to take the president-elect both seriously and literally.

Christopher Davis: One of the most insightful things said of Donald Trump supporters is that they take him seriously, but not literally. Everyone else, though, took Trump literally, but not seriously. Now that he is the President-Elect of the United States, investors have decided to take him both seriously and literally.

They take him seriously when he promises massive tax cuts and $1 trillion in infrastructure spending, which has raised inflation expectations around the world. As a result, interest rates have ticked upwards globally, including in Canada. That's hit bond funds and other interest rate-sensitive sectors like real estate, but it has sent stock markets soaring. They take him seriously when he threatens to pull the United States out of NAFTA, which hasn't helped the Canadian dollar as of late.

Now, as the future President, we should take Trump seriously. But it's a real possibility his promises won't have the big impact he has promised. Take withdrawing from NAFTA, for example. Should he do so, the U.S., Canada and Mexico would follow the rules of the World Trade Organization. Under the WTO, the highest allowed trade tariff is 3.5%, not the 35% that Trump promised. Now, ditching NAFTA wouldn't be a good thing for Canada, but it would hardly be a disaster.

Now, let's suppose that the effects would be worse than we could possibly imagine today. That would hurt the typical Canadian investor, who holds about 60% of their portfolio in Canadian stocks. There's a remedy for this, however: diversification. If you invest your portfolio globally, it should be resilient against whatever shocks may come its way.

It's human nature to extrapolate what's happened recently far into the future. Today we worry about higher inflation and interest rates. But a few months ago, investors debated the possibility of deflation and zero percent interest rates as far as the eye could see. The future is inherently uncertain, and few of us can predict it reliably. Focus instead on what you can control. Make sure your asset allocation is aligned with your long-term goals and objectives, and keep costs low. That's what we should be doing instead.

For Morningstar, I'm Christopher Davis.

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