Can your portfolio withstand a US trade war with China?

  • There's a natural fear that the threatened $100 billion in tariffs on Chinese goods may hurt investment portfolios.
  • While the stakes seem high, they are much higher if you get rid of mutual funds containing Chinese investments before careful analysis.
A Chinese soldier stands guard in front of Tiananmen Gate outside the Forbidden City in Beijing.
Getty Images
A Chinese soldier stands guard in front of Tiananmen Gate outside the Forbidden City in Beijing.

There's a natural fear that the threatened $100 billion in tariffs on Chinese goods may hurt investment portfolios. But while the stakes seem high, they are much higher if you get rid of mutual funds containing Chinese investments before careful analysis.

It's important to react slowly. Strategies to help portfolios survive a changing trade environment should include financial advisors reviewing which industries mutual funds are invested in that are within, and affected by, the Pacific Rim, while keeping foreign investments between 10 percent and 15 percent of their portfolio and balancing risk with dividend growth and income funds.

First, let's ease worries about global trade policy changes.

The U.S.-China tariffs standoff is not a sign of more restrictive trade to come in other regions of the world. Thus, you shouldn't consider leaving other foreign markets. While President Donald Trump negotiates to protect U.S. intellectual property in China, the United States is firming up deals across the rest of the globe to keep our friendlier trade relationships still friendly. U.S. and European companies, however, could be affected by tariff strife if materials or distribution are dependent on China.

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If you are invested directly in commodities or commodity funds, you are more likely to feel a shift in earnings if a trade war were to occur. For instance, China is threatening tariffs on U.S. soy crops. You might worry about any investment you have in this sector in the U.S. economy due to the tariffs. But it is also one of the many reasons China needs us as much as we need them — we're doing their farming.

"If you are invested directly in commodities or commodity funds, you are more likely to feel a shift in earnings if a trade war were to occur."

In the Pacific Rim the industries that could be affected are aerospace, automobiles and machinery. Since the current situation generally viewed as a standoff where both the United States and China are going to chisel at their current trade policies rather than act on big words, no moves are being made yet by most mutual funds to change investment strategies. Changes are generally looked at as long-range decisions based on trends.

Trade wars are an important reminder for diversity of investments within a portfolio. I recommend keeping just 10 percent to 15 percent of investments in foreign markets. Your advisor can balance this among all regions. But don't write off China. Growth in the Chinese market is still happening. Individual companies are also stronger than others.

It is part of your advisor's job to discuss with mutual fund managers whom they are choosing to be part of their funds. Make sure you are comfortable with the decision-making process used and explained by your advisor.

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Finally, for sanity's sake and to reduce risk, I recommend that my clients keep a heavy percentage of their investments in dividend growth and income funds. Companies that pay dividends are more likely to be sturdy under any economy. This is because they are generally larger, blue-chip companies.

Dividend funds also have a diverse selection of revenue streams. Thus, they can not only limit impact on investors from trade wars but also act as a hedge against inflation.

While it's always good to prepare for worst-case scenarios by diversifying investments and monitoring global market concerns, a trade war will likely be avoided.

China and the United States both have too much interest in preserving the current trade environment. Both countries can tweak policies enough to please their voter bases without creating a worldwide economic catastrophe.

By Shawn Danziger, financial advisor at Summit Advisory Group

Financial Advisor Hub

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