Financial advisors might consider talking to clients about how the new Trump tariffs might affect their household cash flows and what to do with their portfolios in response, Christine Benz, Morningstar's director of personal finance and retirement planning, suggested Friday.
Benz, in an emailed response to questions from ThinkAdvisor, offered several insights on how advisors might guide clients following President Donald Trump's announcement this week that he would impose massive tariffs on U.S. imports, sparking a major market selloff.
"For most advisors, I would think that the possibility of a big equity-market downdraft would already be baked into client plans. And if that's the case, the communication can focus on allaying client worries and pointing to how specific aspects of the plan address whatever risk that the client is pointing to," she said.
"One aspect of the current situation that seems like a new wrinkle is that business owners and employees of firms might start to feel a direct tariff-related hit to their household cash flows. Of course, all of these situations are different, but it seems like a great time to engage with clients on the implications of cash-flow disruptions and the interplay with the investment portfolio," Benz said.
"If a client is expecting that their work-related cash flows might drop, de-risking more of the portfolio to accommodate that makes sense. So might securing non-portfolio sources of household cash flows as a backup to the backup — most working homeowners should consider having a home equity line of credit, for example, which they could turn to in a pinch," she added.
Benz, noting that "impermanence has been a hallmark of Trump's terms in office," also suggested building flexibility into client portfolios and plans "in case some of these tariffs and anticipation of related economic harm are reversed."
Liquidity Needs
The retirement expert recommended revisiting clients' liquid reserves.
"For retirees or people within a few years of retirement, knowing that they have a bulwark of cash and short-term bonds can allay worries about volatility with the longer-term portion of the portfolio," she said.
Holding more liquid reserves, she added, makes sense given that some households are apt to see cash flows from their jobs or businesses decline.
At the same time, she noted, advisors need to be mindful of inflation risk, which is a reason to not overdo the liquid reserves. Benz recommended considering bonds with inflation protection and maintaining ample equity exposure, since stocks out-earn inflation in the long term.
It seems like a good time to make a case for globalizing clients' equity portfolios, Benz noted. While non-U.S. stocks have outperformed U.S. stocks recently, most U.S. investors' portfolios tilt heavily toward American stocks, even though foreign equities have a valuation and dividend edge, she said.
Benz also addressed how to approach clients' retirement versus taxable accounts.
"It's important to make sure that the client's liquidity is readily accessible. That means that for most pre-retirees, the cash reserves would be in non-retirement accounts. Additionally, if an advisor has concluded changes are in order to the client's taxable account, thinking through the tax consequences of any repositioning is a crucial step," she said. "Finally, one silver lining of market downdrafts is the opportunity to make changes that will save on taxes — tax-loss harvesting and Roth conversions, especially."
Inflation Protection
She also suggested that clients bear in mind the importance of protecting their portfolios against inflation, which the tariffs are expected to stoke.
"In general it seems that investors underrate the role of inflation protection in their fixed income portfolios; too many portfolios are focused on nominal bonds rather than those with embedded inflation protection. While demand for TIPS has recently picked up, even TIPS bonds or funds purchased today offer protection against additional inflation shocks. In other words, the timing isn't terrible," said Benz, referring to Treasury Inflation-Protected Securities.
Advisors and clients shouldn't beat themselves up if they didn't predict this specific market downdraft, Benz added.
"But ideally their client portfolios and plans would always be resilient and diversified in the face of the sorts of risks we've seen on display recently: big equity-market shocks and concerns about inflation and recession. Humility should be advisors' watchword rather than predicting any specific outcome," she said. "The best way to express humility is to diversify."
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