Since the election this past November, I’ve been closely watching for both big changes in our economy as well as the more subtle but often more impactful changes.

The uncertainty that gripped the nation is slowly starting to lift, but what comes next is hardly predictable. Trump's return to office has sparked both excitement and anxiety in the investing community, and navigating this new landscape will require more than just hope and optimism—it will demand a strategic and proactive mindset.

In this article, I will break down the changes I’ve identified so far, explain how I think we should adapt financially, and then discuss some of the risks and opportunities I see on the short- and long-term horizons.

We saw a fascinating phenomenon with the “Trump Bump,” a term coined by financial pundits that describes the noticeable surge in financial markets immediately following the election. But what does this really mean for us as investors?

The sentiment was clear: excitement and optimism were in the air. For many investors and entrepreneurs, the prospect of deregulation and a general pro-business environment under Trump's administration was a game-changer, driving the Dow up by over 1,500 points on the first day and further growth in the subsequent days.

What psychological factors drove this positive volatility?

Investor sentiment plays a crucial role. We, as humans, tend to react emotionally, which can lead to sharp swings in asset prices, especially during uncertain times. I urge my fellow investors to remember we need to balance their excitement with a level-headed strategy—especially in volatile markets. This balance is critical as we navigate these uncertain waters. It’s great to be optimistic, especially when several KPIs support that mindset, but it’s equally important to balance that optimism with a healthy dose of caution.

Fed projections are currently driving markets down

Despite the initial surge, we’re not on Easy Street yet. Over roughly the last two weeks, the stock market has declined, including a significant 1,100-point drop on 12/18 driven by the Federal Reserve’s projections for 2025. This is the biggest losing streak in a staggering five decades, according to Barrons.

In my opinion, this is a separate and unrelated facet to our economy because it’s being driven by investor sentiment, which is based on the Fed’s announcement in this case. There have been no major policy changes to warrant this decline, so I see it as a primarily fear-based emotional response.

The market reaction was predictable. Americans are already on edge because of how the economy has performed over the last several years. Hence, a negative projection by the Fed and the constant doom loop pushed by the media triggered a disproportionate response. Plus, the holidays tend to be stressful, compounded by financial worries and increased household spending.

Essentially, I think this decline was inevitable, and I believe it will level back out before the new year as people’s concern over the Fed’s projections fade away.

Understanding the road ahead: a mixed bag of challenges

The political landscape is changing rapidly, with many government agencies in chaos right now, driven by talk of significant cuts to unchecked government spending. At the same time, entrepreneurs are excited about becoming unburdened by what has been. They know the positive impact that cutting burdensome government bureaucracy can have on their businesses, and it’s reinvigorating their optimism.

On the other side of that coin, however, is the impact these clearly necessary cuts to government spending will have on the economy as everything resorted.

There are a few factors at play here. Spending cuts mean layoffs, which means, at least for some time, that they won’t be contributing to the economy and, in some cases, may collect unemployment benefits.

However, the overall impact of this should be minimal since the entire federal workforce is only about 1.9% of the total workforce. Collectively, between federal, state, and local governments, this total comes to 13.4%.

While this isn’t an insignificant number, local government entities are funded by local taxes, so these cuts shouldn’t affect them. Those laid off due to spending cuts will likely have difficulty finding a job because of the state of the job market.

Another factor is the impact of these cuts on government contractors and suppliers. Many of those who provide goods and services to the government will face a reduction in revenue, which will likely result in layoffs if they can’t pivot to replace that revenue in the private sector.

The downstream effects of these two groups facing cuts may be more significant than some realize because numerous individuals and companies rely on them as customers or clients. In other words, it’s not as simple as many people think. Don’t get the wrong idea here—this doesn't mean we shouldn't make those cuts. We need to for our nation's survival, but we need to be prepared for the economic fallout that will come with it.

So, what does this mean for our economy and investments?

Unpredictability of policy changes

The Trump administration is known for its unpredictability, whether discussing an offhand comment at a press conference, on social media, or on sweeping policy changes.

Changes can happen overnight, affecting everything from trade to taxes. How do we prepare? By being adaptable and understanding how the economic landscape may shift. The growth potential is massive for some industries, particularly those in tech and finance, while industries reliant on government support will face downturns.

Because of this, it’s critical to consider how the industries you invest in are involved with the government and how they may be impacted by policy changes intended to cut spending.

Balancing risk and opportunity

We must balance risk with opportunity because today's market is volatile and unlikely to change soon. I believe we’ll see many life-changing opportunities in this economy, but that also brings the risk of life-changing losses. This demonstrates the need for a robust strategy.

Diversification in the right assets

Diversifying investments is essential, especially during turbulent times. Why? Because spreading your money across different assets can help reduce risk. But it’s also important to diversify with the right assets for this economic environment.

I’m not a fan of most securities because I prefer tangible assets like real estate and precious metals, but my personal preferences aside, the stock market tends to perform poorly during an economic downturn. At the same time, tangible assets tend to perform better—plus, they also act as a hedge against inflation, which helps preserve the value of your retirement portfolio.

I’ve covered this in previous articles, which is even more critical now than over the past few years.

Enhanced due diligence is critical

In a volatile economy, people tend to cut corners and take more significant risks to chase returns or make up for losses. That doesn’t just apply to the end investor but to those offering the investment opportunities and everyone in between.

This makes due diligence more crucial than ever, but what has worked for the last several years isn’t enough to protect you today, no matter how experienced you may be. Even seasoned investors are susceptible to making a bad investment due to overconfidence or failure to analyze the opportunity effectively. (Or, often, a combination of both.)

I have a robust due diligence process that I’ve refined over the years based on decades of investing experience, but even that doesn’t ensure I never make a bad investment.

That’s why it’s so important to look for ways to improve your process constantly. I look at mine every quarter to determine where I can make changes based on knowledge, experience, market conditions, and technology. While you can never eliminate all risk, you can reduce it dramatically by consistently doing this.

This is essential because a significant loss can wipe out years of gains.

Preparing for financial pain: a pragmatic approach

While there will be tremendous opportunities in the coming years, there will likely also be immense pain. This is less hypothetical and more historical. Markets move in relatively predictable cycles, so we can identify patterns to make proactive investing decisions based on how the economy has behaved in the past.

Recognizing pain as an economic transformation

Let’s face it—financial pain isn’t just a possibility; it’s a certainty. In the world of economics, discomfort is part of the process. Just think of it like exercise. To build strength, we have to endure the burn. Similarly, in finance, markets go through fluctuations that can feel painful but often lead to growth in the long run. This is simply a matter of the economy correcting to a more balanced state.

Minimizing or eliminating debt

The US is facing historic debt at all levels—government, corporate, and personal- which has a devastating effect in slowing our economy down and reducing productivity because capital is needed to service that debt and the accompanying interest. This leaves less room for your budget to capitalize on opportunities and can paint you a financial corner if your income declines or expenses increase.

Focus on preservation over returns

Rather than swinging for the fences to maximize your returns right now, you should focus more on capital preservation. This is achieved by investing in stable, tangible assets and performing comprehensive due diligence before making any investing decisions.

Community and collaboration: working together to profit more safely

In times of financial uncertainty, having a strong community is incredibly valuable. It’s not just about sharing profits; it’s about sharing knowledge. Think about this: how often have you faced tough decisions and found solace in a friend’s advice? Supportive communities help us navigate the turbulent waters of investments as we face unpredictable markets. But don’t just ask random friends for advice. I encourage you to join collaborative groups. These gatherings are more than casual meetups; they provide rich, shared experiences with a pool of investors to brainstorm and collaborate with. Remember, iron sharpens iron. Leaning on community support amplifies our strengths and sharpens our insights as investors and entrepreneurs. Together, we can face the future with confidence.

Conclusion: Stay grounded and strategic in this tumultuous economic era

This period of change presents undeniable opportunities for both investors and entrepreneurs. We can navigate these waters more effectively by maintaining strategic thinking and flexible planning. The challenges ahead are real, yet they also hold the promise of transformation. Equipped with the right mindset, we can turn obstacles into opportunities.

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Dr. David Phelps created Freedom Founders to help its members achieve the freedom they wanted in their lives by building the necessary financial foundation. He is a noted financial expert who is regularly cited by the media, and recently helped the FL Dept. of Education develop its new financial literacy curriculum.