Investing During an Election Year
This year has brought with it a global pandemic and subsequent market volatility, as well as a ferocious election cycle. Investing during an election year has often been a challenge as uncertainty about the future of the government leads investors to also feel uncertain about their portfolios as well. Though it may be tempting to use predictions about the election to “beat the market,” elections years should be treated as just another year in a long-term, goals-driven investment strategy.
Elections Bring Volatility
Elections are, by their very nature, uncertain. If there’s one thing markets don’t like, it’s uncertainty. From the beginning of primary season through inauguration day, elections bring market volatility. However, volatility isn’t necessarily a bad thing. Investors who are willing to endure market variation are often rewarded with value buying opportunities. Many actively managed mutual funds thrive on investments made during volatile times.
Election Effects on Returns
Historically, elections have made essentially no difference on long-term investment returns. The vast majority of Americans are investing with a time horizon – or planned investment length – of at least five years. Any short-term volatility caused by an election is nothing more than a blip of a sound, long-term investment strategy.
Avoiding Parties or Politicians
While it’s fine to have personal preferences when it comes to politicians or political parties, projecting those preferences onto the market is rarely a good idea. Since FDR took office in 1933, there have been seven Republican and seven Democrat presidents. The stock market has gone up and down under both parties, but the prevailing trend has been positive regardless of party affiliation. Trying to avoid a particular party or candidate would have severely hampered investor’s returns.
Timing the Market
Ask nearly any investment expert and they’ll tell you, trying to time the market almost never works. There are too many forces at work that affect market conditions. This is no different during an election season. Investors who stick with their long-term investment strategy through election cycles will be best served in the long run. An analysis by Capital Group shows investors who remained fully invested or made monthly contributions fared better over the last 22 election cycles than those who remained in cash to avoid election-related volatility.
Election Day Surprises
Increased volatility and the need for diligent investment strategy don’t just apply to the months leading up to elections. The same discipline may be required in the days and weeks following the election as well. For example, on election night in 2016 as states began announcing surprise victories for Trump, the S&P fell by more than 5% in premarket trading, triggering a circuit breaker to halt trading. By market close the following day, it was up over 1%. In the days following the election, many pundits made dire predictions of instantaneous recessions, which ultimately proved to be false.
Focus on What Can Be Controlled
With news and media incentivized to grab attention over the election, remaining steadfast can be a difficult task. Instead of hyper-focusing on what might happen under the dozens of possible election outcomes, target your energy on things within your control, like making sure your portfolio is properly diversified against volatility and in-line with your long-term financial goals.
The information provided is for informational purposes only. It is not intended to be used, and should not be used, as the sole basis for legal and/or tax advice. Individuals should seek and rely upon the guidance and advice of their own legal and tax counsel before making any decisions regarding any planning, investment, tax concepts or strategies discussed herein. Individual circumstances may vary and results discussed are no guarantees of applicability or future performance.
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