Historically, markets have delivered similar returns under both Democrat and Republican administrations. For that reason, my view is that investors shouldn’t worry too much about who occupies the White House. That’s why I tend to stay away from discussions involving politics. But sometimes the news coming out of Washington dominates the headlines in a way that can’t be ignored. Such is the case today.

Especially since the market has begun to falter recently, investors have been asking questions about the new administration’s policies and are wondering how they might respond.

To think through this question, we can start with a closer look at the two policies that have received the most attention: the imposition of higher tariffs and the creation of a new cost-cutting department under the leadership of Elon Musk.

There are a number of concerns with tariffs. Most obvious is that they could result in higher prices for American consumers. Especially after the recent spike in inflation, consumers are stretched thin, and further price increases would be unwelcome. But tariffs can have even broader implications for the economy.

When prices are higher, people can’t afford as much, and that can cause the economy to slow. When the economy slows, corporate profits fall and that, in turn, can lead to lower stock prices.

In addition, there’s the risk with tariffs that other countries could retaliate, imposing their own tariffs on American goods. That could hurt domestic manufacturers. It’s for all these reasons that economists are nearly unanimous in seeing tariffs as a bad idea.

What about the new Department of Government Efficiency (DOGE)? This initiative too is raising concerns because it seems to be focused primarily on reducing government headcount. And since the federal government employs about three million people, the concern is that significant cuts could materially affect unemployment.

Compounding that would be a dynamic economists call the multiplier effect. When people lose their jobs, they aren’t able to spend as much, and that can lead to a slowing of the economy. They might also sell their houses, leading to downward pressure on home prices. A further concern is that if the government workforce is cut too significantly, critical services might be impacted.

That, I think, summarizes the key concerns around these new policies. The question, though, is how to respond, and that is the hard part. It’s hard because the negative scenarios I described above are all realistic but not necessarily guaranteed.

The use of tariffs, for example, could end up being temporary and just a negotiating tactic to achieve political aims with other countries. If that’s the case, then there would be little, if any, inflationary impact.

Even if higher tariffs were put in place permanently, they aren’t guaranteed to cause the spike in inflation that many fear. That’s the view, of course, of Scott Bessent, the new treasury secretary, who explained the administration’s thinking in a recent interview.

But even critics of the administration have argued that higher tariffs may result in only modestly higher inflation. In November, Alan Blinder, an economist who served in the Clinton administration, wrote an opinion piece that carried the headline “Trump’s Economic Plan Has Inflation Written All Over It.” But when he broke down the math on prospective tariffs, his conclusion was that consumer prices might rise, at most, by 3%. And Blinder notes, it would be a “one-shot price increase.”

Similarly, DOGE’s efforts to cut back on the federal workforce may not have the negative impact many fear. To be sure, the impact is negative for those who lose their jobs, and I don’t minimize that. DOGE’s objective, though, is to reduce the government’s annual deficit, which has reached alarming levels in recent years. Reducing the deficit would help bring down interest rates, which would help both the government as well as everyday consumers. And since interest payments now account for one-seventh of the federal budget, the impact of reducing interest rates could be considerable.

In short, the ultimate impact of these new policies is not a foregone conclusion. Proponents and opponents each have their own views, but it’s too early to know for sure how they’ll affect the economy now and into the future. As you think about your own portfolio, though, you may find the following analogy helpful.

The author Nassim Taleb, author of The Black Swan, compares investment markets to a pool table. When you hit the first ball, you can be pretty sure where it’s going to go. And a skilled player might be able to control what happens when that first ball hits the next one. But beyond that, it’s anyone’s guess. Things are just too random.

That image, I think, does a good job illustrating the dilemma investors face today. It’s hard enough to know what will happen in the short term. It’s even harder to know what will happen in response. And it’s nearly impossible to know how that will all net out to affect investment markets a year or two or three from now. And thus, it’s nearly impossible to know what action an investor should take.

That might sound like an unhelpful conclusion, but the good news is that we don’t need to be able to see the future in order to guard against negative outcomes.

Instead, this is the approach I recommend: As a thought experiment, let’s assume that all of the negative predictions are borne out—that the tariffs and cost-cutting do result in a recession and a stock market downturn. If we assume that these negative outcomes are guaranteed, then investors can ask themselves a question which is, I think, much easier to answer: How should my portfolio be positioned for a market downturn?

The good news is that this is a question that, in my view, investors should always be asking themselves, and it has, to a great degree, a straightforward answer: I believe that asset allocation and diversification are always an investor’s best defense.

Most importantly, if you have sufficient resources outside the stock market—in some combination of bonds and cash—you should be well positioned to weather even a multi-year disruption to the market.​