With every election cycle, there comes a wave of anxiety among investors. The fear that investments will implode if the "wrong" party is elected is a common concern. Many investors mistakenly believe that they can control investment outcomes and that these outcomes are highly correlated to presidential elections. However, the reality is far more complex.
The Misconception
It's a common notion that the stock market's performance hinges on which political party holds power. This belief leads to frantic adjustments in investment portfolios based on election results. But this is a misconception. Historical data reveals a different story. The Dimensional chart, for instance, illustrates that market performance over various presidential periods shows no clear pattern favoring one party over the other. This data-driven perspective highlights that while politics can impact markets in the short term, it's far from the only factor at play.
The Long-Term View
Investors need to maintain a long-term view. Reacting to short-term political events can lead to impulsive decisions that may harm investment returns. A disciplined approach to investing involves sticking to a strategy that doesn't shift with every headline or political change.
Consider the chart below that highlights the growth of $1,000 invested from 1999-2023 as represented by the Russel 3000. Missing just the best week over this time period resulted in a nearly 17% lower ending portfolio value. But an investor who feels like timing the market is an effective strategy rarely “sits out” for just one week. The chart goes on to demonstrate that for the investor who missed the best 6 months resulted in a 35% lower portfolio balance.
The overall conclusion here is that an investor is more than likely going to have greater success by increasing their “Time-In” the market as opposed to “Time-ING” the market.
A Broader Perspective
Investors should consider the multitude of factors that drive investment returns. These factors often outweigh the impact of political events:
- Interest Rates: Central banks' decisions on interest rates can significantly influence the markets.
- Health Crises: Events like pandemics can have a profound effect on economies and markets worldwide.
- Oil Prices: Fluctuations in oil prices can impact various sectors, from transportation to manufacturing.
- Natural Disasters: These can disrupt economies, but they can also lead to periods of rebuilding and growth.
- Technological Advances: Innovation drives growth in industries and can create new market opportunities.
- Corporate Activity: Mergers, acquisitions, and other corporate actions can have significant impacts on market performance.
- Congressional Actions: Legislation and regulation changes can influence specific sectors and the broader market.
The Solution
Rather than focusing on political events, investors should build a robust investment strategy that considers a broad range of influences. Here are a few strategies to consider:
1. Diversification: Spread investments across various asset classes to mitigate risk.
2. Regular Reviews: Periodically review and adjust the portfolio to align with long-term goals, not short-term events.
3. Professional Guidance: Work with a financial advisor to develop and maintain a strategy that withstands market volatility.
4. Stay Informed: Understand the broader economic landscape and how different factors can impact investments.
5. Resist Impulsive Decisions: Avoid making drastic changes based on political news. Stick to a well-thought-out plan.
Conclusion
Political uncertainty is a constant in the investing world, but it shouldn't dictate investment strategies. By maintaining a long-term view and considering a wide range of factors, investors can build resilient portfolios that weather political and economic storms. The key is to stay disciplined, diversify, and keep the bigger picture in mind. This approach not only helps in navigating the uncertainties of political events but also positions investors for sustainable growth over time.
FOOTNOTES & SOURCES:
Dimensional Fund Advisors: The Market and US Presidential Elections
Dimensional Fund Advisors: The Cost of Trying to Time the Market
