How to protect your life savings from the tariff fiasco

If the tariff-triggered drop in your 401(k) balance has got you sobbing into a pint of Ben & Jerry’s, you’re not alone. U.S. and global markets have yo-yoed in reaction to the current administration’s inexplicable tariff wars. And since this market downturn is a direct result of American foreign economic policy, we may not be able to just wait for a recovery in the next few months (or years).

While there’s no promise of fiscal unicorns and rainbows at the other end of this, economic history may offer some guidance.

The Smoot-Hawley Tariffs

None of us has ever lived through a tariff-triggered market crash, which is part of the reason why we’re all chewing our fingernails. But just because this is a new worry for modern investors doesn’t mean our current situation is unprecedented. America has been through a tariff trade war before, thanks to the work of the improbably named Utah Senator Reed Smoot and Oregon Representative Willis Hawley—two men without a single first name between them.

You may only remember the Smoot-Hawley tariffs of 1930 as part of the mind-numbing lecture Ferris Bueller missed on his day off, but this act raised import duties in an attempt to protect American farmers and businesses. Unfortunately, the Smoot-Hawley tariffs prompted retaliatory tariffs, which further entrenched the financial crisis known as the Great Depression.

Here’s why the history with Messrs Smoot and Hawley is important: it gives us a precedent to look to. Any financial adviser worth their salt will tell you that past performance is no guarantee of future returns—but understanding how markets have reacted in the past can offer some perspective on how markets may react in the future.

What’s different about this market volatility

The current financial turbulence stems from the president’s tariffs rather than a market crash like the 2008 housing bubble collapse. That’s important because we know how to plan for the worst-case scenario of a market crash.

While anything but fun, market crashes are relatively common and repeat on a somewhat predictable seven-to-ten-year pattern–followed by an average recovery time of 1.4 years.

Since our current heartburn-inducing market ride stems from America’s global retaliatory trade war, we can’t necessarily count on the “natural” rebound that has occurred after every other destabilizing market event in recent memory. Any countries angry about America’s tariffs could make financial or policy changes that will continue to affect the U.S. market for years to come. There is simply no way of knowing what long-term effects there will be on our investments.

Let tariff history be your guide

Even though none of us can personally remember a tariff trade war, we can learn from the devastating effects of Smoot and Hawley teaming up, bleach and ammonia style, to impose massive tariffs. 

Looking back to see how other countries reacted to America’s isolationist financial and foreign policy in the 1930s and how the market responded to the subsequent tariffs being flung back and forth across borders like a game of hot potato, we can make plans and predictions based on the historical worst-case scenario.

Specifically, Smoot and Hawley showed us that tariffs often lead to retaliatory tariffs, which can have a negative impact on the market. Even though there is no way of knowing what will happen, it’s probably a good idea for investors to buckle up for a bumpy ride.

Best practices for surviving Trump’s tariffs

You can get to the other side of this economic nightmare if you keep a cool head and follow these strategies:

Remember that the market will eventually recover

For anyone who is 10 or more years out from retirement, you can feel confident that things will improve. Unless we’re in a “dogs and cats living together–mass hysteria!” type of extinction-level event, consider ignoring your 401(k) balance for a little while.

Your investments will do better if you back slowly away from your portfolio and let the market recover.

Forewarned is forearmed

Just because the market will return to some semblance of normalcy without any effort on your part doesn’t mean you should do nothing.

Now is the time to shore up your finances by paying off high-interest debt, setting aside money into an emergency fund, finding ways to lower your expenses, and starting some secondary income streams in case of job loss or involuntary retirement.

All of these actions will help your finances whether we’re in for a long stretch of tariff-induced market nastiness or things are about to come up roses.

Invest conservatively as you get closer to retirement

Your asset allocation is supposed to get less risky as you approach retirement, since that will protect your principal in case of a market downturn at the wrong time. If you’re planning to retire in the next few years, you can make sure any new contributions you make to your retirement accounts are invested in low-risk-lower-return assets, like bonds, treasury funds, CDs, or other cash equivalents.

While these investments aren’t going to grow like the market normally would, the market also may not grow like it normally would. Stashing your contributions into these kinds of investments will offer you more peace of mind that the money will be waiting for your retirement.

You still have time for market recovery

Once you’re no longer in the flush of youth, you may assume you don’t have the luxury of investing for the long-term. It’s not like a 60-year-old can afford to wait out the market like a 30-year-old can.

Except, you can invest like you have decades ahead of you. Because you do!

Even while you approach retirement and during your retirement, you will keep a portion of your portfolio invested for the long haul. When you retire, you don’t need all of your money right away. You’ll keep a significant chunk invested for a longer time horizon, which helps ensure that your money will last your entire life.

How to respond if you’re already retired

By far, retirees are the most vulnerable to a protracted market plunge. Going back to work or waiting out the market weirdness are generally off the table for retirees, so it can feel like there are no good choices.

But that doesn’t mean retirees are helpless in the face of larger economic forces. As with current workers and near-retirees, retirees can make plans now for the worst-case scenario. This might include:

• Reducing expenses: This is easier said than done, considering the price of eggs and everything else, but start thinking about ways to downsize your costs.
• Selling items: If you have a lifetime’s worth of home goods, collectibles, or Precious Moments figurines sitting around, you may want to start selling some off. This could be a good way to increase your retirement income without having to take money from your investments.
• Considering a reverse mortgage: Since your home is likely your most valuable asset, a reverse mortgage could be a decent way to access cash from something other than your investments.

Don’t panic—plan

Panic is the leading cause of selling at the market’s low point. Instead of selling off your investments to staunch the flow of tariff-induced anxiety, make a plan instead.

If you assume the market may be bumpy for the foreseeable future, how will that change your financial decisions?

Making investment choices based on that assumption will serve you well no matter what happens. In the best-case scenario, things will recover sooner than expected and this will be a footnote in your investing career. But even in the worst-case scenario, planning for volatility will help you make more rational decisions—and protect you from making your paper losses real by getting out of the market.

It may be a bit of a grim sounding win-win, but it’s a heck of a lot better than crying into a pint of Chunky Monkey.