3 financial lessons to learn from Donald Trump's victory
Who would have thought a year and a half ago that Donald Trump would be president-elect of the United States?
Before he announced his candidacy in June 2015 – at an event in which he called Mexicans rapists – his was generally seen as nothing more than a sideshow. In 2012, when he reportedly mulled a run but decided against it, his political ambitions were skewered on cable TV in a Comedy Central roast of the real estate mogul.
No one's laughing now.
[Read: 10 Ways You Can Invest Like Donald Trump.]
Who can say what the next four years will hold? There will doubtlessly be some lessons we all learn from Trump's presidency, but we remain many months away from learning any of those.
Thankfully, we don't have to wait that long for investing takeaways. There are already three strong lessons for investors that this election can teach us.
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Lesson No. 1: Expect the unexpected. No one sees the future with 100 percent clarity. Hell, meteorologists struggle just to forecast the weather a few days out. In investing, as in politics, the same holds true. Just as soon as you think you have it figured out, prepare yourself for some hard losses.
"Nassim Taleb brought the phrase 'black swan' into financial markets. A black swan is an event, positive or negative, that is deemed improbable yet causes massive consequences," says Bob Johnson, president and CEO of The American College of Financial Services.
Donald Trump, president-elect, is that black swan.
"A few short weeks ago, the election looked to be a foregone conclusion with (Hillary) Clinton the sure victor. Yet, 10 days before the election information on an FBI investigation into her emails reversed her momentum and led to the result we saw," Johnson says.
"Investors should understand that events happen that we could not possibly foresee. Probabilities are fine, but underdogs occasionally do win and unexpected events do happen," Johnson says.
A simple way to incorporate this lesson into your portfolio? Diversify. If you'd had all your eggs in Valeant Pharmaceuticals (ticker: VRX) when it plunged from $250 to $20 a share due to concerns over its bookkeeping, for instance, you'd be financially devastated.
But in even a very modestly diversified portfolio of 10 equally weighted positions, your loss is dramatically reduced, going from 92 percent to just 9.2 percent.
Lesson No. 2: Risk management is absolutely essential. "With Clinton as the known risk and Trump as the uncertain uncertainty, Trump's win suggests that the market dislikes uncertainty less than it dislikes risk," says K C Ma, professor of finance at Stetson University.
"This election is also unique in that, for the first time, the majority of the voters picked the candidate whom they expect will cause the least 'damage' to the country. This is similar to investors' goal to minimize the downside risk," Ma says.
[Read: Earnings Preview: Trouble Isn't Over for Mylan Stock.]
"When estimating expected downside risk, candidates like Clinton with a long political record are almost always in a more vulnerable position."
There are several investing takeaways here, diversification once again being one of the key lessons. Diversification across a portfolio is able to decrease volatility without decreasing expected returns, a beautiful thing.
Secondly, just as Clinton's long political record gave opponents more ammo to come after her, companies with more environmental, social, and governance policies end up having more ethics controversies.
Lesson No. 3: Don't count out the underdog. Though simplistic-sounding, the concept of reversion to the mean is arguably one of the most important concepts in all of investing. The idea is that stocks, sectors or assets that underperform compared to their long-term historic averages will "mean-revert," or eventually go through a period of short-term outperformance to bring them back in line with long-term averages.
"Following the herd and believing everything you read in the news can result in a false sense of fear or complacency in any arena," says Jon Ulin, certified financial planner and managing principal of Ulin & Co. Wealth Management, a branch office of LPL Financial in Boca Raton, Florida.
"Whether politics or investing, it is imperative to do your own research and develop your own opinion. Many times the underdog stock, sectors and mutual funds today become leaders over the next year while the front-runners end up in the back of the pack," Ulin says.
Sound familiar? Hillary Clinton has arguably been the front-runner in the 2016 presidential race since Barack Obama locked up the Democratic nomination back in 2008. In a few weeks' time, Donald Trump emerged from out of nowhere to seize the presidency.
In investing, the "Dogs of the Dow" is one of the more famous strategies based on this underdog-heavy approach. It stipulates that at the beginning of each year, investors rebalance their portfolio to hold 10 of the 30 Dow stocks with the highest dividend yield in equal portions.
[See: 11 Stocks That Donald Trump Loves.]
While this doesn't, strictly speaking, tell investors to buy underperforming blue-chip stocks, it often amounts to doing just that, since Dow stocks with rising dividend yields are frequently seeing that due to falling share prices.
Copyright 2016 U.S. News & World Report
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