How I’m Preparing For a Trade War – 3 simple steps

Ray Dalio, legendary hedge fund billionaire and author of the best seller “Principles” said yesterday was the first day of the US/China trade war. Like many things in the current environment, it can be hard to cull out bloviating rhetoric from things that actually matter and are important. That said, a trade war could bring on some bumpy times in the markets and hurt certain sectors or spark a recession, who knows? Many different industries in the US could be harmed as China ups the prices of specific products to retaliate and inflict political damage. Remember that sometimes volatility can be viewed as a positive thing. If you are dollar cost averaging and buying a few shares of stock each pay check, perhaps you will pick some up on discount as the market over reacts. Here are 3 simple steps to keep in mind if the trade war expands and continues (which looks likely as the two juggernauts, the US and China, vie for the upper hand):

1. Stay Diversified

If you are diversified into low cost index funds and ETF’s, then your portfolio may be buffered from the most damaging effects of a trade war. If you are highly invested in soy beans, then you and the soy bean farmers may be in store for some pain. Practice strong fundamentals, see a fiduciary financial planner and ensure your asset allocation is prepared for all weather.

2. Emergency Fund

It is always always always a good idea to have built an emergency fund, typically 6 months of emergency expenses. This buffers you from job losses or major challenges in life. If a recession hits and somehow your industry is effected, an emergency fund could make a major difference.

3. Control & Knock Down Debt

When difficult financial times arrive on people, those with lots of debt seem to lose the most. When the great recession hit, people that were in huge amounts of debt lost their houses, cars, toys, etc. That is partly because they never owned these things to begin with, they were simply borrowing them from actual rich people that own banks and large amounts of capital. As always, control and reduce debt when possible.

Back to Basics

Dealing with things like trade wars in our personal lives are really a matter of getting back to basics. When the fundamentals are strong, then the entire foundation is strong. Many Chinese consumers appear confused by the recent developments. GM sells more cars in China than in the US. More Chinese than anyone own Apple products. In general, it appears that Chinese people love American products. I guess we will see how long the love lasts. We totally understand this is a complicated story in so many ways and many Chinese policies have lead to the theft of US intellectual property. Perhaps this trade war will result in more balanced behavior from both sides? The truth is probably that both economies need each other to thrive and grow over the long run.

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