Whether you’re a Republican, Democrat, or none of the above, most people can probably agree that President Donald Trump’s second presidency has been off to an eventful start. Policy pronouncements and initiatives are being announced at a breakneck pace, and it can be challenging to keep up with the daily news coming out of the White House. (Toward that end, The New York Times now publishes a weekly full-page summary of pronouncements and policy changes). The daily news flow ranges from things that only impact people within the United States, such as Medicaid reform and tax policy, to initiatives with a regional or global impact, such as major changes in tariff policy and aggressive overtures to countries such as Canada and Greenland.

The sheer volume of stuff happening probably has investors on edge. The CBOE VIX Index, which measures the market’s expectations for volatility in the next 30 days based on S&P 500 options, has reached about 22.2 as of this writing, compared with a long-term average of about 20. The latest result for the University of Michigan Consumer Sentiment Index was well below its long-term norm (indicating pessimistic sentiment), and the most recent result for the AAII Investor Sentiment Survey showed a large increase in bearish views among individual investors.

Why You Should Tune Out the Noise

The temptation to do something in response to major events is ever present. Why should you tune it out instead?

For one, the Trump administration has been unpredictable. Policy pronouncements that seem to be pointing in one direction one day can easily reverse course the next.

Second, it’s difficult to predict the downstream result of any given policy change in advance. Take tariffs, for example. Because they’re an additional tax on imported or exported goods, they effectively increase the price of products for producers and end buyers, which would seem to be inflationary by definition. That’s not necessarily the case, though, because people sometimes end up skipping purchases or buying substitutes instead. Take the Smoot-Hawley Tariff Act, which went into effect in 1930 and raised tariffs on imported goods to much higher levels. While this legislation led to a downturn in international trade and made the Great Depression much worse, it did not lead to a spike in inflation; in fact, the period from 1930 through 1932 actually saw a significant decrease in aggregate price levels.

The energy sector is another case where the market response to policy changes was difficult to predict in advance. The Trump administration’s energy policies, which loosened regulation and created a more favorable climate for fossil fuels, would seem to create a more benign environment for the sector. Biden, on the other hand, openly denounced fossil fuels while supporting investments that expanded renewable energy and green technology. But as John Rekenthaler pointed out, the energy sector fared much better under the Biden administration than it did during Trump’s first presidency from February 2017 through January 2020.

And finally, there’s overwhelming evidence that attempting to make tactical shifts in a portfolio’s asset allocation is not just ill-advised, but detrimental. I won’t belabor this point since I wrote about it in a recent article. Suffice to say there’s no indication that even investors who focus on asset allocation for a living can consistently improve returns by shifting a portfolio’s asset mix.

What to Do Instead

One of the best ways to tune out the market noise is to go back to the basics. Here are some helpful steps to take.

Check to see if your overall asset allocation makes sense. The mix of stocks, bonds, and cash in your portfolio should be driven by your investment time horizon and risk tolerance, not what might happen with factors outside of your control. The Morningstar Lifetime Allocation Indexes can provide some general guidelines for asset-class exposure based on your age and planned retirement date. Our Role in Portfolio framework provides more specific guidance for making sure your holdings are appropriate for your time horizon and occupy a reasonable percentage of assets.

Rebalance your portfolio if needed. If it’s been a while since you checked your portfolio’s asset mix, chances are that stocks, specifically US growth stocks, now account for a larger percentage of assets than you might expect. As I detailed in a previous article, some rebalancing may be to cut back on areas that have grown and add to areas that have been out of favor, including fixed income, value stocks, and international issues.

Don’t sweat a little extra cash. I’m not a fan of making sweeping portfolio changes, especially if they’re driven by panicky thoughts about what might happen in the market. That said, I don’t think holding slightly more cash than usual is a bad thing given current market conditions. The yield curve remains relatively flat, meaning that bond buyers aren’t getting much in the way of extra yield to compensate them for taking on additional interest-rate risk. The 3-month T-bill currently yields about 4.3%, which doesn’t look too bad even if inflation continues running a bit higher than the Federal Reserve’s 2% target level.

Don’t get too carried away with “safe haven” assets. The price of gold has soared by about 40% over the trailing one-year period, partly because of aggressive purchasing by central banks. It’s now trading a bit below its all-time high of about $2,956 per ounce. Although gold has historically fared well as a safe haven during times of market turmoil, it’s not a low-risk asset. In fact, its volatility is about on par with the equity market overall, even though its long-term returns are substantially worse. Gold is also trading at a relatively steep price in inflation-adjusted terms, which has historically led to lower returns over the subsequent 10-year period.

Conclusion

For investors with a long-term perspective, short-term market volatility is a distraction that’s better off ignored. While the market could be in for a bumpy ride over the next few months, it’s best to stay the course and avoid making any major portfolio changes based on the latest headlines.