MONEY WISDOM DEEP DIVE:
It's understandable why investors might be tempted to make election-based investment decisions. Let's examine common arguments I’ve heard in my conversations with investors and why they may be flawed:
"The president's policies directly impact the economy and markets." While presidential policies can influence the economy, many other factors play significant roles, including global events, technological advancements, and actions by the Federal Reserve. The market's complexity makes it difficult to isolate the impact of any single factor.
"Historical data shows certain parties are better for the market." Long-term data shows that markets have performed well under both parties. External factors often have more influence than party affiliation. The Exhibit below shows the growth of one dollar invested in the S&P 500 Index over nine decades and 17 presidencies (from Coolidge to Baiden).
"Making quick changes can help me avoid potential market downturns." Timing the market is notoriously difficult. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants, including expectations about the outcome and impact of elections. Investors who make reactionary decisions often miss out on subsequent rebounds, potentially harming long-term returns.
"This election is different/unprecedented." Every election feels unique, but markets have weathered various political scenarios over decades. Diversification, including geographic diversification and a long-term strategy remain key regardless of the political climate.
"Big investors seem to be making moves based on the election." What works for large institutions with complex strategies may not be suitable for individual investors. Moreover, we often hear about the few who guess correctly, not the many who guess wrong.
Consider the 2016 election: When Donald Trump won, many analysts predicted a market crash. Instead, the S&P 500 rose 19.4% in 2017. Conversely, after Joe Biden's victory in 2020, some forecasted economic doom. Yet, the S&P 500 gained 26.9% in 2021. These examples underscore how difficult it is to predict market performance based on election outcomes.
Conclusion
In this election season, remember: your investment strategy should transcend political cycles. Stay focused on your long-term financial goals, not short-term political winds. If you're feeling uncertain, reach out to discuss your concerns and ensure your portfolio aligns with your long-term objectives.
|