Election years can be a source of anxiety for investors. Constant media speculation about how the outcome of the election will impact the economy and the stock market can lead investors to make emotional decisions that potentially harm their long-term financial goals.
However, history shows that staying invested during election years is usually the best course of action. We’ll take a look into why elections have little impact on long-term investment returns, and how investors can avoid making investment decisions based on short-term political anxieties: by focusing on the fundamentals.
Elections and the Stock Market
Since 1928, the S&P 500 has seen positive returns in 20 of 24 Presidential election years, while bonds have also performed well in election years. This data suggests that elections have a minimal impact on the overall performance of the stock and bond markets.
Looking for a connection between who wins the White House and how markets perform is natural for investors. But shareholders are investing in companies, not political parties. Those companies focus on serving customers and growing their business, regardless of which party is in control in Washington. Notice a common theme in the below chart from Dimensional Funds?
Avoiding Market Timing
The volatility that has historically been seen in election years is an undisputed fact and tends to influence investors to consider sitting on the market sidelines. Pulling out of the market completely costs investors, however, as BlackRock data shows stocks return an average of 11.6% in election years since 1926. This is slightly ahead of the 10.3% average annual return over that same period. Taking emotions out of investment decisions and choosing to orient around historical data helps weather volatility that investors should expect in election years.
Election Year Strategies
Volatility shouldn’t mean riding the ups and downs of markets without making any changes. Our proactive portfolio management uses volatility to rebalance accounts and ensure that every account stays in line with its desired risk tolerance. Unlike passively investing in an index that gets rebalanced once per year, a disciplined rebalance strategy can be used to potentially take advantage of higher volatility in any given year. Take a look at a deeper dive into our rebalancing strategies here: Passive Strengths, Active Insights: Navigating the Investment Ocean.
Another potential strategy to employ during the volatility historically associated with an election year is dollar cost averaging. By investing a set amount of money at regular intervals, investors automatically purchase more shares when prices are low and fewer shares when prices are high. This helps smooth out the impact of volatility on your overall investment. Whether done for a lump sum that is in cash or through ongoing contributions to an account, dollar cost averaging is a disciplined approach that allows for staying invested while not worrying about timing markets perfectly.
Long Term Perspective
Rebalancing and dollar cost averaging are powerful strategies to employ when volatility increases, but it is difficult to focus on the long run when faced with the short-term political noise generated during an election year. That’s why we use financial planning. A custom-tailored financial plan can help put short-term market volatility in the context of a long-term financial plan, whether you are currently retired or 40 years away.
Source: Blackrock
Source: Morgan Stanley
Disclosures:
The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Indexes are unmanaged and cannot be invested in directly.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
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