After two years of double-digit gains, the S&P 500 (^GSPC 1.33%) lost its momentum -- at least temporarily -- in recent days. The index has slipped more than 4% over the past two weeks due to concerns about the tariffs President Donald Trump has placed on imports from China, Mexico, and Canada. These tariffs -- 25% on goods from Mexico and Canada and 20% on goods from China -- went into effect earlier this week.
The White House later put into place a one-month delay on tariffs for automakers complying with the United States-Mexico-Canada agreement's trade rules. Any such flexibility could reduce some of the negative impact on companies, and the market is likely to be on the lookout for more such moves or flexibility from the Trump administration.
Still, economists have warned that the tariffs rolled out as planned could push prices higher and support the case for a longer period of high interest rates. That sort of situation could weigh on costs of companies that manufacture goods abroad and hurt sales of those that rely on imports.
On top of that, higher prices may rein in consumer spending. All of this together represents uncertainty for corporate earnings growth, prompting some investors to hesitate before buying stocks.
Does this mean you should flee the stock market? Not at all. Instead, to protect your portfolio, here are three things every investor should do.
Image source: Getty Images.
1. Ensure diversification
The first thing you should do is review the contents of your portfolio to ensure it's well diversified across stocks and industries. If you hold stocks across sectors, this could protect you from extreme moves -- if one area faces headwinds, another may compensate. This is particularly important during the current trade war, as certain companies and stocks may suffer more from the tariffs than others.
It's also important to keep in mind that today's highfliers could become tomorrow's struggling players. For example, in early pandemic days, coronavirus vaccine makers Moderna and Pfizer soared, but recently, those stocks have been in the doldrums as demand for their vaccines declined. Even if your current holdings are winning, you'll want to be sure they aren't concentrated uniquely in one sector.
Finally, when diversifying, only invest in industries you understand. This will help you better evaluate a company's earnings and make the right investment decisions during your time as a shareholder.
2. Hold some cash for buying opportunities
After last year's gains, many stocks started this year with high valuations. However, recent declines have lowered those, offering some interesting buying opportunities.
For example, artificial intelligence (AI) chip leader Nvidia (NVDA 3.01%) today trades for only 26x forward earnings estimates, down from more than 48x earlier this year. And many other companies across industries are in the same situation.
NASDAQ: NVDA
Key Data Points
It would be a shame to miss out on these great buying opportunities. That leads me to my next point: At times of market uncertainty, hold some cash, if possible, that you can use to pick up high-quality stocks that may fall to reasonable levels.
This shouldn't be part of your emergency fund, which is a priority. Before setting cash aside for investing, be sure that all of your bills and near-term obligations are covered. If they are, then the simple move of holding on to cash today may offer you the chance to get in on once-in-a-decade opportunities tomorrow.
3. Focus on the long term
Whether the current trade war endures and weighs on companies and the consumer's wallet or whether it's short-lived, you'll set yourself up for success if you keep your eyes on the long term. The problem about focusing too much on the short term is it could push you to panic about a decline in a high-quality stock and sell it or pick up a low-quality stock just because it has momentum right now.
Those sorts of moves may wreak havoc on your portfolio's performance. Instead, it's crucial to consider a company's long-term prospects. Even if the stock is falling today because tariffs may weigh on earnings, ask yourself these questions:
- Does the company have what it takes to manage the tariff situation and recover and thrive in the long run?
- Has this company successfully managed challenges like inflation in the past?
If the answer to both is "yes," that looks like a valuable stock to hold, even if it struggles in the near term.
This focus on the long term also will remind you that the stock market, as a whole, always has gone on to recover and grow after downturns and other difficult times. If you stick with it over a period of years -- holding on even as some of your favorite companies face challenges such as today's trade war -- you, too, could score a big win.
