The Informed Investor
The upcoming November presidential election has many people unsure of what to do with their investments. Both the election itself and surrounding circumstances have created volatility and stress, so it is not surprising that people are wondering if they need to make changes to their investment strategy.
If you are unsure what to do, here is a rundown of factors that may be helpful.
What Usually Happens to the Stock Market Before Elections?
There is strong evidence that market behavior and presidential elections are correlated—but not necessarily the way people assume.
CNN reported on a review of S&P 500 returns and presidential election results since 1944 (conducted by S&P Global). The study found the following:
- The incumbent party won 82% of the time when the S&P 500 rose in the months going into the election.
- The incumbent party did not win 86% of the time when the S&P 500 fell.[i]
There clearly appears to be a connection between the two, but not in a way that will necessarily help your investment decisions. This correlation suggests that you would be better off using the stock market to predict the presidential election’s outcome, rather than the other way around.
Volatility Historically Precedes Presidential Elections
The same CNN report also highlighted another study that found a different correlation between stock market trends and presidential elections. This study found that the stock market tended to become more volatile during election years, with that added volatility subsiding in the months that immediately followed.
When evaluating potential implications of this correlation, however, it is important to keep the actual definition of volatility in mind. Increased volatility does not necessarily mean the markets are going up or down dramatically, just that they are fluctuating more than usual. These fluctuations tend to be short-term, so they likely will not have much bearing on your long-term portfolio performance.
Volatility is more likely to have implications for traders or those seeking short-term gains. If you are a long-term investor, however, a few months of volatility leading up to an election do not usually have much of an impact. As long as you have the time to ride this out, it should not affect your investment decisions much.
Timing the Stock Market Is Notoriously Difficult
With this backdrop in view, it is also necessary to acknowledge how notoriously difficult it is to accurately time the markets. Even among professional investors, few—if any—can consistently and accurately profit by predicting turning points.
Moreover, the opportunity cost of mistiming the market can be high. If you pull your money out of a strong market to protect gains, you risk having those funds in cash while the stock market continues to climb. If you watch a weak market from the sidelines until you feel safe again, you stand to miss out on gains if you reinvest too late.
Instead of trying to time the stock market, we help our clients invest according to a predetermined, disciplined plan. Handling your investments according to a formal plan can help you emotionally prepare for short-term volatility while keeping you invested long-term.
Stick with Your Long-Term Plan
In light of all of this, you can see that the smart investing strategy is not to base your investments on the presidential election. Instead, it is more important to continue to follow your personal investment strategy (as long as that strategy is sound in the first place). If you have a well-designed plan, you can tune out short-term noise such as the election and continue to execute your plan with discipline.
Develop an Investment Policy Statement
We realize not everyone has a written plan for managing their investments. If you do not, definitely think about establishing one now. We recommend creating an Investment Policy Statement and we guide all of our clients through this process. You can learn more about why this is a critical part of your financial future here.
The investment policy statement is something that is set up to handle all of your wealth management decisions, and to give your strategy discipline.
If you are already working with a financial advisor, be sure they create one with you and refer to it often.
If you do not work with a financial advisor, consider creating an Investment Policy Statement yourself, so you can focus on your long-term objectives when your portfolio and the markets hit rough spots. Our team is happy to discuss how we might assist you with a well thought out investment strategy designed to achieve your financial goals and all that is important to you.
That way, you can make smart investment choices based on your strategy, rather than on political polls, elections, or the latest news headlines.
[i] Updegrave, Walter. Should I Avoid the Stock Market Until After the Election?. CNN, November 2016. https://money.cnn.com/2016/11/02/retirement/stock-market-election/
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