Charles Ellis, known as the dean of American investment advisors, has words of wisdom for American investors: Prepare for a riskier world.
The short-term volatility brought on by the surprise news of Donald Trump's victory has already faded. Overnight, stock futures dropped sharply on the surprise win, but the , Dow Jones Industrial Average and the NASDAQ were trading around the flat line by mid-morning.
The bigger questions are whether the volatility will return, and in the long-term, how should individual investors respond? After news of the election broke, Ellis said, a friend came to him in tears. "She was scared," he said. "Anybody who is not scared is crazy."
"In this fragile world, electing a leader who is not committed to the international process and working out answers for the common good is dangerous," he said. "Take the Cuban Missile Crisis. Take Jack Kennedy out, and put Donald Trump in."
A former board member of Vanguard, the world's largest mutual fund company; the Yale Endowment and a longtime advisor to institutional investors, Ellis is known for sage advice that balances economics and investing. He said investors might be tempted to panic and sell — or be opportunistic and buy. The right answer is to slow down, Ellis said.
He suggested investors who need to should shift more money into cash so that they have six months to one year's supply. In the short term, "if you were to ask me, Will stocks be 20 percent up this year or 20 percent down, I'd put all my money on down 20 percent."
A recent analysis by Chicago-based Calamos Investments found that from 1991 to 2015, preelection years — the year prior to a presidential election — historically have outperformed the other years of a presidential term, and election years have been historically weaker. Over the last 25 years, on average, there has been a -19 percent drop in market performance from preelection years to election years.
Yet, Ellis said, the market is still a good bet to be higher in the long term, longer than five years.
"Try to take a long-term perspective," he said. "Count to 100; try to envision yourself five, 10, 20 years from now. Will you look back and think the right decision was to sell everything? Probably not."
He has other advice for investors:
1. Don't sell on a market's nosedive.
History suggests the markets will digest the news and reach equilibrium. What's driving them now is the surprise of the election and, to some extent, fear of protectionist policies Donald Trump could enact in the next few years, balanced against what could also be a pro-business, pro-infrastructure agenda.
That uncertainty, combined with the unforeseen reactions by the world community, probably means more volatility in the short term, Ellis said.
If the volatility extends into months or years, your best bet is to keep up a regular program of investing. If you try to time the market, you are apt to miss the best and worst days. In fact, $1,000 invested regularly in a volatile market versus $1,000 investing in a rising market actually produces higher returns if the money is invested regularly over time, according to evidence compiled by Burt Malkiel, the Princeton economist and author of "A Random Walk Down Wall Street."
2. Don't fool yourself into seeing this as a market opportunity.
Individual investors tend to forget that every time they make a trade, they are making it against a professional investor. If you try to buy specific stocks or groups of stocks now, you're trading against someone who has studied the market in much more detail and has decided it's time to sell. The chances of you winning that game are minuscule, said Ellis, whose latest book is "The Index Revolution."
3. If you don't have enough in cash, consider shifting assets.
"That is highly dependent on the person," Ellis said. "You should have enough in cash so that you can calm down."
For many people, Ellis said, that number is probably higher after Trump's election. He said a good rule of thumb is to have a six-month to one-year pool of cash. But wait until the markets have adjusted to the news before making your move.
4. Diversify your portfolio.
Trump's campaign was run on promises to take a hard look at trade agreements and pull back on some of the U.S.'s involvement in the world. One of the reasons news of his elections is roiling the world is the belief in the basic premise that trade helps overall economic growth. If the world's largest economy pulls back on trade, it could dent global economic growth.
But just because America pulls back on globalization doesn't mean globalization will stop. Changes enabled by new technology, like the internet, mobile phones and new cross-border financing strategies, will continue. But another country, like China, could take the lead on expanding the world economy, Ellis said.
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If you've focused on the U.S. economy with your portfolio, it could be time to expand your worldview and look to global stock and bond index funds, such as the Vanguard Total World Stock Index or the iShares Global 100 ETF.
"In the long term or the short term, diversifying more is almost always the right thing to do," Ellis said. "It's uncomfortable because it takes us into unfamiliar territory."
5. Don't focus on the first day of your retirement.
The people scared of volatility in the wake of the Trump election are those close to retirement. But your time horizon doesn't end on day one of your retirement.
If you are nearing 70, chances are good you will live to 85 or beyond; and you don't need all of your retirement assets on day one. Your portfolio will have time to recover from today's volatility. Stay invested in stocks for the long term.
And finally, be realistic.
Be aware that — in Ellis' view, anyway — the world is a more dangerous place. If that means taking a more conservative stance with the amount of cash you have on hand, or buying more bond funds or paying down debt instead of investing, so be it. You may reduce your long-term returns over time, but the lower risk could be worth it to you.
"The odds of something seriously dreadful happening have gone up. What are the chances of a real war? They are higher than they were a week ago," he said.
— By Elizabeth MacBride, special to CNBC.com
