The Trump Administration has announced tariffs on trade with other countries. While there has been a lot of uncertainty as to how these policies will evolve, it’s generally agreed that tariffs can be inflationary, and they have also sparked volatility in the financial markets. How should you respond to tariffs — as a consumer and an investor?
As a Consumer…
• Review your budget. If you’re worried that higher prices will put stress on your cash flow, look for ways to cut costs, perhaps by eating out less often or eliminating streaming services you no longer use. Look for items that could easily be swapped for cheaper alternatives, like generics for brand names. You may even be able to get a better deal from your cable or internet providers, just by asking.
• Build or replenish an emergency fund. It’s typically a good idea to have an emergency fund containing three to six months’ worth of living expenses in a liquid, low-risk account. Usually, you’d want this fund available to meet large, unexpected expenses, such as a medical bill or a new furnace. But with the possibility of tariffs causing inflation in some sectors, you might also want your emergency fund ready to handle price increases in items such as car parts.
• Accelerate large purchases susceptible to tariffs. If you’re already planning on making a large purchase, and you think the price may be affected by tariffs, you might want to act now, if you can afford to do so. Some items that may be susceptible to tariffs include automobiles, smartphones and computers.
As an Investor…
• Diversify. Tariffs may affect some industries, such as automobiles and consumer electronics, more than others, such as healthcare and pharmaceuticals. But rather than making hasty “buy” and “sell” decisions based on tariffs and their possible effects, try to build and maintain a diversified portfolio containing a mix of stocks, bonds and other securities. Diversification is the best defense against the market volatility caused by tariffs — or, for that matter, caused by any other factor. While diversification cannot guarantee a profit or protect against a loss, but at any given time, some asset classes may be up, or not hit as hard as others. And if your portfolio is heavily invested in an asset going through a downturn, you’ll likely take a much bigger hit than if your dollars were spread across the wide array of available investment types.
• Keep following a long-term strategy. Right now, tariffs are certainly in the headlines as a potentially disruptive force in the financial markets. But there have always been such forces — wars, natural disasters, political turmoil, and so on — and while they have caused volatility for a while, the markets regained its footing, sooner or later. And the most successful investors were the ones who stayed the course throughout the disruptive events, rather than jumping out of the market until things cooled down. This doesn’t mean you should never make changes in response to market conditions — at times, you may need to adjust your portfolio somewhat. But by following a long-term strategy based on your risk tolerance, time horizon and financial goals, you’ll be better equipped to cope with market gyrations.
Tariffs can lead to uncertainties in the financial world. But by thinking carefully about how you might respond, you can bring more clarity to your own situation.
