As we gear up for the upcoming elections, there’s a growing buzz of anticipation and, understandably, a fair bit of anxiety among investors. While opinions may vary, it’s essential to strip away the political biases and focus on the economic realities that underpin these eventful years.
Election Years & Market Volatility
Election years are often thought of as years with heightened market volatility, primarily due to the uncertainty surrounding election outcomes and the resulting potential shifts in economic policies. However, while election years may bring volatility, a look into historical market data reveals an enlightening finding: despite the volatility often observed, markets tend to perform well. For instance, the S&P 500 has shown robust performances during presidential election years going back to 1940, except during notable outliers like the financial crisis of 2008 and the dot-com bubble of the early 2000s. Presidential election years might seem scary for investors, but historically, they don’t appear to be.
Psychological Impact of Elections
A critical aspect of investing during election years is acknowledging the psychological influence they exert. People’s perceptions of the economy often reflect their political affiliations, which can lead to biased investment decisions. For example, those aligned with the Republican Party might view the economy more favorably under a Republican president, and similarly for Democrats with a Democratic president. However, such biases don’t necessarily mirror the market’s actual performance. Take a look at the average annual return of the S&P 500 under Presidents Obama and Trump. During their tenures both averaged about a 16% annual return, with President Obama having a 0.3% better average annual return according to JPMorgan (16.3% for Obama and 16% for Trump). An investor, Democrat or Republican, who made changes to their asset allocation may have missed out on returns simply because they didn’t agree politically.
Key Takeaways for Investors
For investors who are finding it difficult to stomach the markets during election years, here are a few key takeaways that may help…
1. Stick to Your Strategy: Your portfolio’s strategic asset allocation should already account for potential market volatilities. Making drastic changes based on election outcomes is generally not advisable.
2. Historical Context: Historically, markets have performed well during election years, barring some exceptions like 2000 and 2008. The key is to understand that momentary volatility often feels much worse than market returns turn out to be.
3. Emotional Discipline: Maintain emotional discipline. Avoid letting political biases dictate your investment decisions. Remember that market performance is influenced by a myriad of factors, not just the current or next administration.
4. Long-Term Perspective: Especially for those in their 50s and beyond, focus on the long-term perspective. With numerous election cycles still ahead, the outcome of a single election is unlikely to drastically alter your financial trajectory.
Remember, your investment strategy should be driven by long-term goals and disciplined planning rather than short-term political events. As always, consult with your financial advisor to tailor your approach to your unique situation and needs. By doing so, you can navigate election years with confidence, knowing that your financial future remains on a steady course.
