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Trump-and-Dump and two other portfolio strategies for the coming era

I call these approaches the Boor Market Strategy, the Stimulator-in-Chief Strategy and the Trump-and-Dump Strategy.

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Canadians weren't able to vote in the U.S. election but they can still register their feelings where it matters most – in their portfolios.

If, like me, you're shaken by the prospect of Donald Trump in the Oval Office, you can trim your exposure to U.S. stocks.

Alternatively, if you see Mr. Trump as the second coming of Ronald Reagan, you can demonstrate your support by backing some of the sectors that Mr. Trump's policies will favour.

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There's even a third option: betting on the president-elect to have a market impact but one that will fade quickly. The key here is to get in and out before the downdraft begins.

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Opinion: Trump's economic plan: More mystery than disaster

I call these approaches the Boor Market Strategy, the Stimulator-in-Chief Strategy and the Trump-and-Dump Strategy.

Now, granted, I'm being a bit playful here, but thinking through what each of these portfolios would hold is a useful way of thinking about what Mr. Trump really means to the economy.

Start with the Boor Market approach. Some of us believe Mr. Trump's economic strategy is nothing but bluster. Personally, I'm quite happy to sidestep the chaos that would ensue if he actually follows through on his vows, from reviving the coal industry, to tearing up trade deals, to making Apple manufacture iPhones in the United States.

One way to avoid the impact is to shift money to other markets. This makes sense for reasons other than mere disdain for Mr. Trump. The S&P 500, the traditional benchmark for U.S. stocks, has been stuck in much the same place for a year and a half. U.S. corporate earnings appear to be growing slowly, if at all.

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European, Asian and emerging-market stocks now offer much better value than their American counterparts, according to Jeremy Granthan, the co-founder of GMO LLC, a money manager in Boston that oversees $88-billion (U.S) in assets. "Traditional measures of value score this [U.S.] market as extremely overpriced," he wrote in a note earlier this week.

For that reason, foreign contenders are likely to produce considerably better results than U.S. stocks over the next seven years, says Mr. Grantham, who has a history of astute market calls. If you can take the volatility – and the ups and downs in emerging markets could be particularly wrenching – European and Asian stocks offer one way to buffer your wealth, at least in part, from the possibility of Trump-induced craziness.

In keeping with that thought, the Boor Market Strategy consists of a heavy weighting of exchange-traded funds (ETFs) that focus on countries outside the United States. For the patient investor who's wary of being Trumped, it warrants consideration.

But Wall Street's current optimism is founded on precisely the opposite theory. Many people believe Mr. Trump will set off a wave of growth by cutting taxes, removing regulation and spending big on infrastructure. All of that could light a fire under stocks, similar to the bull run that occurred under President Reagan in the 1980s. Or so the theory goes.

If you buy that notion, the Stimulator-in-Chief Strategy is simple: It consists of putting half your money in an S&P 500 index fund and splitting the remainder between ETFs that track health-care stocks (expected to benefit from Mr. Trump's vow to end Obamacare) and banks (which could benefit from higher interest rates as the president-elect's free-spending, inflationary policies take hold).

But is that a smart move? The parallel between Trumpery and Reaganism ignores some obvious differences. Among other things, there's valuation.

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U.S. stocks were in a coma for years before Mr. Reagan became president. They traded for less than 10 times earnings the day he took office.

Compare that with today: Stocks have enjoyed one of the biggest bull markets in history since 2008. They now trade for more than 20 times earnings.

Given today's rather lofty stock prices, it's quite likely that Mr. Trump's benign effect on the market will dissipate. The Trump-and-Dump Strategy plays on this by buying ETFs tied to some of his favourite hobbyhorses – coal mining, defence spending and infrastructure spending. (A metals and mining ETF stands in for infrastructure spending, on the theory that more building would be reflected in higher metal prices.)

Many of these sectors have already shot up, but may have more room to run in the next couple of months – which is about the maximum amount of time I'd suggest employing this strategy.

Don't feel like putting any of your money down on any of these strategies? In all honesty, I don't blame you. They're more toys than genuine portfolio suggestions. But I'll be following their progress – if for no other reason than to track the president-elect's rhetoric against reality.

The breakdown

The Boor Market Strategy

  • 40 per cent Vanguard FTSE Developed All Cap ex North America Index (VIU-T)
  • 40 per cent Vanguard FTSE Emerging Markets All Cap Index (VEE-T)
  • 20 per cent FTSE Canadian All Cap (VCN-T)

The Stimulator-in-Chief Strategy

  • 50 per cent iShares Core S&P 500 ETF (IVV-N)
  • 25 per cent iShares U.S. Healthcare ETF (IYH-N)
  • 25 per cent iShares U.S. Financials ETF (IYF-N)

The Trump-and-Dump Strategy

  • 20 per cent iShares U.S. Healthcare ETF (IYH-N)
  • 20 per cent iShares U.S. Financials ETF (IYF-N)
  • 20 per cent VanEck Vectors Coal ETF (KOL-N)
  • 20 per cent SPDR S&P Aerospace and Defense ETF (XAR-N)
  • 20 per cent SPDR S&P Metals and Mining ETF (XME-N)
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About the Author

Ian McGugan is a reporter with The Globe and Mail's Report on Business and has been writing about investing, economics and business for more than 20 years. He joined the Globe and Mail in 2010. He has been executive editor of Canadian Business magazine and founding editor of MoneySense magazine. More

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