The U.S. Presidential Election is just seventy days away now, and Americans across the country are paying attention to who will sit in the Oval Office for at least the next four years. The candidates offer a stark contrast in personality and background, while the two party platforms offer two distinct sets of policy solutions. The outcome in November could be a momentous step towards determining the trajectory of the American economy and its place in the world. With such an historic event approaching, plenty of investors are deciding to delay investment decisions until after November 8th. This is a poor investment strategy.
This isn’t surprising. Investors (regardless of who they support for president) are wary of the election outcome, so they either refrain from investing new money into the market, or they pull out altogether. Given the non-stop media coverage and the high negatives surrounding both candidates, it’s tough to blame folks who want to wait and see what happens on November 8th. Unfortunately, this is another instance of emotions taking hold of the investment discipline. Unconventional as the election season has been, there are a number of reasons you should resist the urge to change your investment approach.
The stock market has endured some serious stuff
The past 100 years have been pretty crazy. Two world wars, a stand off between two nuclear superpowers that lasted for half a century, ever present social and ethnic conflict flaring up around the globe, the advent of ideologically inspired terrorist attacks, not to mention a Great depression and a Great Recession with plenty of economic slumps and market crashes in between. That list doesn’t scratch the surface of the adversity seen over the past century, so one would think that it has been a tough environment for investor returns. After all, how can economies expand and businesses profit with all of this strife? That’s a topic for a different time, but the point is that economies did grow, businesses did profit, and at a rate exponentially faster than any point in modern history. Of course, plenty of investors lost plenty of money along the way. But they all have had one thing in common: they panicked during crises and sold their investments. They failed to see beyond the sorry state of affairs in the present to the longer-term strength of a capitalist based economy.
Markets spiraled after the Brexit, but rebounded quickly thereafter
The “Brexit,” Britain’s now infamous decision to leave the Eurozone this past June, provides a recent example of how easily and prematurely panic can grip the markets. The S&P 500 fell nearly six percent in the two trading days following the June 23rd referendum, and the bottom seemed to be nowhere in sight. That seems like a substantial loss, until you consider that the market had a strong rally leading up to vote of 3.6 percent from May 19 to June 23, largely attributable to the markets assuming a “remain” vote from Britain. And, once panic subsided and investors realized that Brexit, although likely a headwind for global growth, would not be sinking the world economy into catastrophe, shares rebounded quickly and U.S. stock indexes are once again pushing all-time highs. Even if you had bought into the market on the eve of the referendum, you would be up over three percent as of August 22, 2016, just two months after the vote.
Timing the market is never a good strategy
When it’s all said and done, holding out until after the election is just a different brand of the time-tested worst investing strategy ever created: trying to time the market. It is certainly possible the stock market could precipitously drop after the election. It’s also possible that it may drop before the election. And, it’s also possible that it will finish the rest of the year with a double-digit gain. Determining what the market will do over the next three to five years is difficult. Knowing with certainty what will happen in the next six months is impossible. As we have shown in the past, time in the market is matters—not timing the market.
Politics inspires passion, which is why it’s harmful to investors
It’s a good thing to be civically engaged, to stay informed and develop convictions about the best course forward for our country. That said, it’s important to prevent passionate political discourse from leading to short-term investment decisions. You may very well be disappointed in November, and you may think that our country is heading in the wrong direction. But whether you’re a Republican, Democrat or somewhere in between, consider this: when George W. Bush was inaugurated on January 20, 2000, the S&P 500 closed at 1,445.57. Since then we have had two much-maligned administrations, one Republican and one Democrat. The market has seen the dot-com bubble burst, the 9/11 terrorist attacks and the Great Recession, to name a few of the hardships. Despite all of that, the S&P 500 closed this past Friday at 2,169.34. This comes out to a return of more than 50%, even assuming you spent all the dividends along the way.
So, will the elections impact your portfolio? There’s no way to know until after the vote has come and gone. However, the important thing is to keep your perspective on what the market does over the long-term and simply ignore the noise during the short-term. Your mix of investments should only depend on two things: how much risk you can stomach, and how much time until you need the money that you’re investing. If you have a well-diversified portfolio, short-term market movements can only hurt you by leading you to make bad decisions.