I hope you had a nice Thanksgiving, whether with family, friends, or on your own, wherever you found yourself.
Now we’re onto December where we find ourselves in a sea of unknowns –
· What’s going to happen to interest rates and even the independent Fed?
· Who wins and who loses if the U.S. imposes higher tariffs as Trump has promised?
· Which industries will be affected if the massive deportation program kicks in?
· What will happen to inflation?
· Is the U.S., and the world, headed for a recession?
· What does it mean that Warren Buffett sold nearly $1 billion of Apple (AAPL) stock?
Rest assured. I have all the answers. But don’t tell anyone else.
OK, I don’t have all the answers. In fact, I probably don’t have ANY of the answers, but I do have some thoughts that I want to share that may be helpful as you think about what to do now.
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Before I do, I want to quickly share a note I received from a former colleague. He said:
I’m considering taking all my assets out of stocks for the year of 2025. Talk me out of it.
Here’s what I told him:
Why?
As an investing strategy, it’s almost NEVER a good move to cut stocks fully out of your portfolio. There are income and long-term growth opportunities under any market conditions.* And there are shorter-term trading profits to be made in most market conditions as well. So, even if you are absolutely certain the wheels are about to fall off the economic bus, in a substantial and sustained way, it doesn’t make sense to liquidate all of your stock holdings.
Bond yields and money market rates are coming down and commercial real estate, as an example, is even more risky with the effects of remote work still unclear. Given that, most of us mere mortals are hard-pressed to come up with a better asset class in which to invest than stocks.
Having said that, you may want to reduce your exposure to stocks if you think there’s a big crash coming. Moving some assets to cash/money market funds, or even gold could be something to consider if you want to be conservative.
You also may want to move into more conservative, more defensive stocks. Also, some of the long-term dividend-paying companies can be good stocks to have in the portfolio if you want to be more conservative.
As for crypto, that tends to rise along with bull markets. So it is doing well now, but it also tends to stall in bear markets, so it’s a much riskier place than gold if your goal is capital preservation while weathering a storm.
* As a never-say-never type of person, I rarely use terms like “never” or “always” but in this case I do. Even in the depths of the Great Depression, there were stocks that performed well.
I would also note that it is rarely a good idea to precipitously get 100% into or out of an asset class, especially a specific stock. I read recently about a man who put 98% of his portfolio into the company behind Truth Social, Trump Media & Technology (DJT).
Regardless of your political views or beliefs, it is NEVER a good idea to be so concentrated in your investments. You make yourself enormously vulnerable. If 2024 Elon Musk had come to me in 2010 and told me where Tesla would be trading in 2024, I would still not have invested 100% of my assets into the stock. It’s just too risky.
Where are we now?
I’ve said it before and will repeat it here – the U.S. economy is VERY strong and is the envy of virtually all developed economies around the world. Things aren’t perfect but they are very good.
The change of administration introduces the likelihood (certainty?) of some level of change to the economy, the implications of which are far from clear. On the one hand, Trump promises to be business-friendly in many ways. On the other, the talk of tariffs, the talk of mass deportations, and the chaotic instability of his first term are all things that deeply concern leaders in many industries.
Notably, Exxon Mobil CEO Darren Woods urged President-elect Trump to stay in the Paris climate agreement, saying “I don’t think the stops and starts are the right thing for business … It is extremely inefficient. It creates a lot of uncertainty.”
That same concern about uncertainty applies to threats to bring the Federal Reserve (the Fed) under more control of the executive branch. The independence of central banks has been a core component of the strength and stability of the major economies around the globe. Undermining that independence would introduce uncertainty that would likely have a negative effect on economic growth, at least in the short term.
Extensive tariffs and deportations will almost certainly drive up inflation and prices of a wide range of goods and services, which will disproportionately affect the buying of the middle and lower classes, reducing demand and ultimately causing companies to reduce production, jobs and wages. That is something of a death spiral leading to slowdowns, recession, or worse.
I’ve addressed all of the questions above, except the one about Warren Buffett selling so much Apple stock, so let me quickly address that. Buffett has famously advised to buy when others are fearful and to sell when others are buying. In May of 2023, Apple represented just under 40% of Berkshire Hathaway’s equity holdings. As of November 22, that percentage was still a whopping 23.4%. It is worth noting that Berkshire Hathaway has been a net seller of equities over the last two years.
So, is he taking profits and rebalancing his portfolio or is he moving away from equities? First, to be clear, Warren doesn’t run all of his ideas by me. In fact, we have gone weeks at a time without talking to each other. All of that is to say, I don’t speak for him. But here’s my guess.
All of the above.
He’s certainly taking some profits and rebalancing his portfolio. I think he’s also hedging somewhat. When your investment portfolio is as big as his, you can’t move quickly. And the global situation is fraught with concerns that could change quickly. There are two wars with global implications. Relations between China and the U.S. are somewhat strained and potentially worsening under the Trump administration. And in the background is the possibility of another global pandemic.
For the rest of us, I don’t think we need to or should panic based on Buffett’s actions. We can move in and out of stocks much faster, so we don’t need to play as defensively. But it’s always wise to be aware of what Berkshire Hathaway is doing.
The Bottom Line
This is not a time for massive change to your investment strategy, as my friend above was considering. (That kind of extreme action is almost never warranted.)
It’s not a bad time to be a little cautious, however. That might entail trimming your equity holdings somewhat or just moving to more conservative positions. It’s certainly a time to review and rebalance as necessary after the strong market this year to make sure your assets are as diversified as you intend them to be.
This is a time when investor discipline can be very important. With all due respect to my readers, that is an area where individual investors don’t always do well. We get greedy and that causes us to sell too late. Or we overreact to a loss and pull out of the market for too long.
Stay tuned to your Cabot analysts. If things do start to change, if things do turn bad, they’ll let you know and tell you what to do – when to take profits or trim your exposure, when it’s safe to buy, how to mitigate downside risk and not lose ground.
Until then, the market is doing well, it’s a great time to be an investor, and we’re here to help you be even more successful.
Yours for investing success,
Ed Coburn
President, Cabot Wealth Network
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