In these uncertain economic times, Ritholtz Wealth Management Chief Investment Officer Barry Ritholtz advises clients to consider the range of outcomes — and notes that risks are heightened now for those who need their money in the next few years.
“The possibilities of error are rising and we should very much be aware of it,” Ritholtz, the firm’s co-founder and chairman, said on the ETF Prime podcast hosted by The ETF Store President Nate Geraci, posted Tuesday.
“For those of you who aren't looking at retirement in 20 years, that you need your money in the next three, four, or five years, hey, there's a genuine risk here,” he said.
Ritholtz, who recently wrote “How Not to Invest: The Ideas, Numbers, and Behaviors that Destroy Wealth — and How to Avoid Them,” outlined how his messaging to clients has evolved in recent months as changing tariff policies have whipsawed markets, and how he navigates financial advice in a politically charged environment.
In a call with clients in January, Ritholtz noted the stock market had just had two spectacular years back to back, gaining about 25% each year.
“What you find out is when you get five or six years worth of returns in 24 months, the future is like, hey, maybe we should all lower our return expectations. If we're plus five or 6% this year, I would be thrilled,” Ritholtz said.
Then came April 2, the big market selloff prompted by President Donald Trump’s tariff announcement.
“I talk a lot about people not mixing politics with investing. And the challenge is, all right, if you have a kid and you're contributing to the 529 plan or you're retiring in 10, 15 years, you gotta ask yourself, is this worse than the great financial crisis? It's worse than the pandemic? Try to look through it.
"If you're retiring in the next 12, 18, 24 months, hey, the challenges are definitely higher. So those are the sort of conversations we've been having with people,” Ritholtz explained.
Consider Probabilities
As far as unraveling politics and financial advice, "the world isn't black and white. Nobody knows anything. We don't know what the future holds. So rather than make these bold, declarative statements, think in terms of probabilities and range of outcomes, not binary black and white outcomes,” Ritholtz said.
In the best-case scenario, people are told not to take Trump literally on tariffs, that he’s using a negotiating tactic, “and all of this mayhem is a way to get China to cut a better deal with us that’s fair to everybody,” Ritholtz explained. “I think that that's a reasonable best-case scenario. A couple of deals get announced, we avoid a recession and the market and the economy continue."
The worst-case scenario is “the end of Pax Americana, all the advantages that have been due to the most envied economy in the world, the United States economy in the post World War II era,” he said. “Nobody buys our bonds, nobody subsidizes our deficit. We lose the exorbitant privilege of the reserve currency … That's the worst case scenario. A recession turns into a depression."
In the middle cases, Ritholtz said, “some bad things happen, some good things happen, and the historians look back at this era and say, ‘Well, there was an asymmetrical response to a genuine problem.’”
Economic Russian Roulette
He compared the proposed tariffs against China to playing Russian roulette on the $28 trillion U.S. economy. “It just feels a little reckless to me to put so much of our incredible advantages that we have enjoyed since the end of World War II at risk to cut a deal with China.”
Objectively, Ritholtz said, “We are increasing the possibility of an unforced policy error with all sorts of unintended consequences to address genuine problems. It kind of feels like where a hammer would be fine but we’re using a pile driver.”
A couple of months ago, he suggested that clients “tune out the noise,” but the message has evolved over time, “because it's one thing to say tune out the noise. It's another thing to just stick your head in the ground, ostrich style, and ignore everything that's going on,” Ritholtz said.
The message about genuine risk to those needing money in the next few years ultimately evolves into one about "the cost of chaos," and looking not only at policies but how they're implemented, he said. Now, "recession probabilities are going up and the chance of a real unforced error is really significant.”
"Regardless of your views on tariffs, you have to look at how this was implemented and say geez, this is kind of hamfisted. And you can't just big foot your way into the global economy without warning. I mean, I guess you can, but what happens is the market spasm and you get down 15% in a really short period of time," the CIO said.
Ritholtz said he has clients on both sides of the political aisle.
"I try and play it right down the middle, but I also don't want to engage in false equivalency and say, well, one side says the Earth is flat, and the other side says, the earth is an oblate spheroid and they both make good points. It's like, Hey guys, these are your policies. You didn't communicate it well," and explained what they're trying to accomplish, he said. "'Don't spook the market' might be surprisingly good advice for presidents."
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