Trump’s Tweets versus Individual Stocks
As I was reading “How to Make Your Money Last” by Jane Bryant Quinn this weekend (a very well-written and informative book, by the way), I came to her section on investing. She’s not a fan of owning individual stocks, just like me. As any of my clients will tell you, I don’t advocate holding any one stock in a portfolio, but if you find yourself holding an individual stock, limit your holdings to no more than 5% of your total investment portfolio. It’s too risky to hitch your portfolio’s performance wagon to any one company’s performance.
But what came to my mind while reading this section was how, more than ever, it’s important to follow this recommendation. I found myself thinking of our future president’s propensity to Tweet about individual companies. Even though he hasn’t been sworn in yet, we’ve seen instances where his Tweets that are favorable for a company resulting in that company’s stock price increase, as well as the opposite.
What’s so disconcerting is that many times these Tweets appear to come out of left field. We weren’t told that he was meeting with the CEO of this or that company or studying the industry that the company is in. A Tweet just appears all of a sudden which is either damaging or supportive of a company’s stock price.
Imagine you’re invested in a conservative, blue-chip, dividend paying stock. Its share price is fairly steady so you feel comfortable owning a large amount (say 25% of your portfolio). You almost think of it as a bond holding, since you can always depend on its steady dividend payments.
Now imagine you wake up one morning to find that your president tweeted the night before that he thinks the company is making too much money from government contracts and he wants an investigation of their business practices. The stock opens 40% lower than it closed the previous evening. Your portfolio just lost 10% of its value.
More than likely, it will eventually rebound once Trump’s interests focus elsewhere, but do you really want to go through all that stress? Better to buy a mutual fund and diversify away the risk of Trump’s Tweets!