Many investors found themselves puzzled by their experience in the markets during the three days following Donald Trump’s Presidential Victory. With the Dow Jones Industrial Average up 2.81% they wondered why their portfolios were flat or down.

First, it is important to remember that the Dow Jones Industrial Average is often called the Dow 30 because it is comprised of just 30 stocks. While the Dow 30 was up 2.81%, the broader S&P 500 was only up 1.16% and the more technology-centric NASDAQ Composite was only up 0.84%

It is also important to note that all three of these indexes (Dow, S&P 500, and then NASDAQ) are U.S. Large Cap Stock indexes representing just one half of one of the six asset classes.

While U.S. stock appreciated during the three days after the election all the other asset classes did not. Here is the change in value during the three days following the election (November 9, 2016 through November 11, 2016) of six different iShares exchange traded funds representing different components of the global bond and stock investments:

• -1.51% iShares Core US Aggregate Bond (AGG) representing U.S. Bonds
• -2.58% iShares International Treasury Bond (IGOV) representing Foreign Bonds
• +1.12% iShares Core S&P 500 (IVV) representing U.S. Stocks
• -0.80% iShares MSCI EAFE (EFA) representing Foreign Developed Stocks
• -7.79% iShares MSCI Emerging Markets (EEM) representing Emerging Market Stocks
• -0.30% iShares North American Natural Resources (IGE) representing Resource Stocks

With all the categories which dropped in price, a typical age appropriate asset allocation for a 40-year old might have experienced a loss slightly over 1% of their portfolio value. This is typical of the experience of a diversified portfolio of non-correlated assets.

Here are eight observations about these moves in the market and what to do in response:

1. Ignore the media. They got the election wrong and they just as frequently get long term global investing wrong. The news media tends to focus on the movements of the Dow 30 even though almost no investors are invested like the Dow. Their job is to sensationalize everything to keep you glued to their news. Fear keeps you watching but it is does not encourage good investing discipline.
2. Remember that bonds are volatile too. U.S. Bonds dropped more in price than U.S. Stocks rose. There is no safe asset class, including cash. Cash goes down by inflation consistently every year.
3. Beware of reading too much into three days of market movements. No matter what narrative you impose on market movements you are still susceptible to the narrative fallacy. Even the title of this article wrongly implies that the markets moved in reaction to a Trump Victory. Perhaps the narrative was simply that people got out of the markets before the election and were waiting until after the election to invest again. Maybe if Hillary Clinton had won the U.S. markets would also have gone up and we would have seen media headlines such as, “Hillary Elected and Markets Soar.”
4. Markets are inherently volatile. In the short term they are a voting machine, but in the long term they are a weighing machine.
5. Year to date trends have been very different from the past three days. Despite drop over the past three days, iShares MSCI Emerging Markets (EEM) is still up 13.02% year to date.
6. Even a small number of traders can move the markets precipitously. Whenever the number of buyers and sellers don’t match, the market makers must provide the other side of the trade and then move the price up or down in order to provide more incentive for the market to fulfill the other side of the trade going forward. Even a small number of trades on one side can move the market, but the market can’t go to zero. If any index began to approach zero you would be able to buy all the companies in the index for pocket change.
7. It is always a good time to have a balanced portfolio. All the news has already happened and it is already known by the markets. Investors have already sold out of real estate and utilities and bought into financials and healthcare.
8. It is always a good time to rebalance your portfolio. At this point rebalancing would involve selling U.S. stocks and buying emerging market stocks. Prior to the election we were selling emerging market stocks (which had appreciated more year to date) and we were purchasing U.S. stocks (which had not appreciated as much as the other categories). These movements of rebalancing can often boost returns.

Whenever market movements are making headlines the best advice is to remain calm and rebalance your portfolio. The greater the urge to “do something” the more important it is to “just sit there” or better yet, “rebalance.”

Photo used under Flickr Creative Commons license.