Being a CERTIFIED FINANCIAL PLANNER™ during an election year, it's almost inevitable that the #1 question you hear is “What will the stock market do if Trump gets re-elected or if Biden gets elected?” depending on which side of the aisle the person sits on. And for that, I keep my crystal ball handy in the top drawer of my desk. You laugh, but that’s exactly what you are asking & maybe even why you're reading this.
When we, as human beings, get scared or anxious, we respond by (1) looking for someone to blame, (2) looking for someone to fight, or (3) looking for someone to fix it. I think we all can agree that there’s a lot of anxious and scared people running around the United States right now for a wide variety of reasons. If you take this perspective into consideration, then some of the crazy things we are seeing in the current election cycle start to make sense. We are looking for someone to blame, someone to fight, someone to fix it.
There’s no doubt, emotions are running high in this current election. And that- not any candidate’s policies ...is the real threat to your portfolio. Here’s some quick tips on how to drown out the noise:
Regardless of the Winner…Stick To The Basics!
The reality is that there’s no evidence to suggest that who the President is, whether Republican or Democrat, should cause you to want to deviate from your investment strategy. No matter who wins the White House, history says presidential politics have a small impact on your portfolio. That’s not to say there won’t be some periods of time when you doubt the system. However, the best recipe for success in investing is diversification and maintaining a long-term focus; NOT how the next President will affect your portfolio.
Instead, let's redirect that focus on (1) things that matter & (2) things you can control i.e.
- Should I be savings more for retirement?
- Am I spending too much?
Ignore Biased Advice
In the world of behavioral finance, we refer to this as “confirmation bias”. This is when you search for, interpret, favor, and recall information that only reinforces your worldview. The problem is that all pundits, like investors, tend to see things through the lens of their own political views. You can pretty much ignore any investment advice that starts off with “If Trump wins …” or “If Biden wins …”
This happens in almost every presidential cycle. In every presidential campaign year, investors are bombarded with suggestions about how to tweak their portfolios by adding a smidgen of exposure to sectors that will shine if Candidate X or Y wins. Google “stocks to buy if Trump wins” or “stocks to buy if Biden wins” and you'll see.
Keep Your Emotions Under Control
After November 3rd, we'll find about half the country will be elated, and nearly half will be scared. And both groups, research shows, are likely to tweak their investments accordingly. That’s when things really get RISKY.
These political biases can easily bleed into your investing behavior. The study "Political Climate, Optimism, and Investment Decisions" found that investors take greater market risks when their party controls Washington. It also discovered that investors affiliated with the party out of power tend to grow restless and trade more frequently. That impatience caused them to underperform compared with when their party is in charge.
While you may be anxious about the upcoming presidential election, it is in your best interest not to abandon your long-term investment plan in attempts to predict market outcomes. Markets are constantly working by digesting current information and expectations about the future, which includes presidential elections.
Get out and exercise your right to vote, but definitely keep politics out of your portfolio.
About the Author:
Desmond Henry is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and founder of Afflora Financial Life Planning in Topeka, Kansas. He helps the retiring/retired plan their finances and invest their money. CLICK HERE to learn more.
Diversification cannot assure profit or protect against loss in a generally declining market. Sketches are courtesy of Carl Richards at Behavior Gap.