Donald J. Trump has made plenty of shocking statements in his campaign for president, but the advice he gave in an interview Tuesday surprised in a different way. Trump said he "got out" of the stock market and urged Americans to abandon equities in their 401(k) accounts, noting that the Federal Reserve's historically low interest rates have pushed stocks to lofty valuations. He predicted markets will fall, though he added they would "go great" if he were elected three months from now.
Trump is absolutely correct that stock valuations look rich, and he isn't alone in suggesting stock prices could fall. Goldman Sachs issued its own report on Sunday suggesting investors pare back their exposure to stocks, blaming global uncertainty and the risk of "shocks" such as a recent coup attempt in Turkey.
But discouraging working people from investing in stocks for the long haul is discouraging them from taking advantage of one of the few ways they stand a chance of getting ahead. Wealthy people like Trump have easier access to stock-market alternatives from private-equity to real estate, while people with less are likely to park un-invested savings in bank accounts and CDs that earn them next to nothing.
Investing regularly in a diversified portfolio including publicly traded stocks is the best way for middle-class, working people to build wealth, prepare for retirement and potentially leave something for their kids. Attempting to accomplish this by timing the market is almost always a money-losing proposition.
Trump, a real estate investor who admits he's never put much money into the stock market, nonetheless likes to present himself as an insider who knows how the system works. What he's really doing is pushing a Wall Street-friendly mantra: The more retail investors try to time the market, the more profit flows to Wall Street, which is built on transaction fees. Those fees from trading are a big reason studies show the average investor underperforms the S&P 500 index.
Retail investors would be better served to follow the advice of investing legend Warren Buffett (a recent critic of Trump's presidential run, and view stocks as small shares in productive businesses. Invest in those businesses regularly, via low-cost index funds, and reinvest the dividends. Add to your nest egg in good markets and bad, smoothing out unpredictable swings on Wall Street. The strategy has paid off handsomely for long-term investors, who have enjoyed a historical average return in the range of 7 percent per year--massively better than today's most generous savings-account rates of just above 1 percent.
Meantime, fearful investors who sold at the Great Recession lows in 2009 missed out on a return of more than 200 percent, or about 17 percent per year with dividends reinvested. Those who instead invested in gold at the market's nadir would have earned an annualized 5 percent per year.
Why did Trump advise his supporters sell stocks? It's possible he genuinely wants to help them avoid losses, and sees equities as over-valued. Plus, many Wall Street prognosticators have warned stock markets could tank if Trump's bid for the White House gains momentum.
On the other hand, Trump may again be looking out for Trump. The stock market's performance in the three months prior to a presidential election almost always predicts the election result: When markets gain, the incumbent party wins; when it falls, the challenger prevails. In other words, Trump may just be talking his own book.