If you’ve been paying attention to the news the last few weeks, then you’ve likely heard the term ‘trade war’ in regards to the U.S. and many of its major trading partners. This news has been sending global sharemarkets on a bit of a roller coaster.
But what does this mean for your investments and should you be concerned? Do you need to rush to the grocer and stockpile Tim Tams?
What is a trade war?
In a nutshell, the U.S. doesn’t like many of its trade agreements and is trying to change them to a more favourable outcome (or so they claim). Because trade deals are complex and hard to modify, the U.S. is attempting to expedite matters by using leverage to get other countries to agree to its terms. One of the methods the American government has decided to employ is the use of tariffs on certain goods.
The risk is that other countries won’t just capitulate to America’s demands, and will retaliate by imposing their own tariffs on American goods. This tit-for-tat continues, and thus erupts into a full blown trade war. The end result is a potential slowdown in the global economy.
So, would this be bad?
Well it wouldn’t be good, but let’s put some perspective on this. The U.S. economy generates around $20 trillion in goods and services, and the proposed tariffs would only affect a fraction of this total.
If things did escalate into a full-on trade war, there would definitely be an impact on the global economy. A well-respected economist named Paul Klugman, published a recent article where he estimates the fallout from a trade war would be 2-3% shaved off the global GDP. That’s a 1/3 size of the impact of the global recession of 2008.
What should you do?
If you’ve invested with Clover then you’re in it for the long-term so the answer is easy – ignore it! The impact a potential trade war would have on your portfolio is negligible.
Volatility is a normal part of sharemarket investing. Sharemarkets have historically delivered higher long-term returns than cash precisely because their short-term returns are so unpredictable.
In investing you get compensated for bearing risk. If share returns were predictable they wouldn’t be risky, and if they weren’t risky there would be no reason why they should generate a higher long-term rate of return than safer investments like cash.
Remember, if you’re invested with Clover, the sharemarket is only one component of your portfolio, with your shares spread across not just the US and Australia, but in many sharemarkets throughout the world.
Depending on your portfolio you may also have exposure to Australian bonds, listed property and cash. These other components help to create the benefit of diversification, an investment approach that is at the core of all intelligent investing.
Plus, if you’re regularly contributing to your Clover portfolio, the occasional sharemarket breather can actually be beneficial, allowing you to take advantage of dollar cost averaging.
So take a deep breath and relax. There’s no need to rush off and stock up on Tim Tams (unless you’re planning a big Netflix binge).
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