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Should the Election Influence Your Investment Strategy?

Feb 19, 2020 3 min read Eric Roberge

Key Takeaways

  • Elections often drive increased market volatility.
  • Temporary fluctuations have little bearing on long-term investors.
  • Those closer to retirement might revisit their asset allocation.

 

Whether it's a midterm election or a presidential election, voting time can amp up investors' nerves. The uncertainty of the outcome is often reflected in the market with a period of increased volatility. That doesn't mean that every other November is destined to be rocky, but investors should be aware that elections can affect the way the market behaves.

 

 

Should you be concerned?

Much of the stock market volatility results from increased speculation, forecasting, and guesses that come with trying to predict the outcome of an election. If there is a dramatic shift in leadership (and potential policies) after the vote, that can also cause volatility depending on how investors interpret those changes.

But that volatility is usually experienced in the short-term. A single election is usually not the sole trigger of massive, long-term market crash (or climb). That doesn't mean elections are meaningless; it's just that they tend to have bigger political ramifications than economic ones.


Long-term investors: Stay the course

If you want to invest your money for long-term goals, like financial independence or retirement, a single election will look like a mere blip on the radar when you look back on it in 30 years. Therefore, you don't need to make major investment moves because of it. Stay the course, because the market volatility that may occur due to an election is not much different than other events that can send ripples through the market.

Consider significant disruptive events that have happened in the last 100 years — the Great Depression in the 1930s, WWII in the 1940s, the oil crisis in the 1970s, the tech boom and subsequent dot-com bust in the 1990s and early 2000s, and the Great Recession in the late 2000s.

Each of these events carried market fluctuations that were far bigger than what a single election might influence — and though it took some time, the stock market recovered. In fact, the historical average return of the S&P 500 is just under 10% Opens in new window.

The key takeaway here is that the stock market trends upward over time. Even if an election causes a correction or downturn, history shows that it won't last forever. When you invest with a long-time horizon, you have years to ride out the down periods — staying in the market ensures you catch the ride back up when it happens.

 

Short-term investors: Revisit your investment strategy

Keeping a rosy long view doesn't mean you should simply ignore current events and assume all will be well with your portfolio. Your life stage and the timeline to your goals matters. If you're only five years out from tapping your nest egg, you don't have the luxury of time and your portfolio may not be able to weather extreme volatility.

That doesn't mean you should sell everything and cash out of the market! But you might want to visit with a financial advisor and review your asset allocation.

It's smart to prepare yourself to experience some market volatility during election years, but trying to predict what will happen beyond that is a futile exercise. Investing success depends more on time in the market rather than market timing.

Focus on what you can control and avoid irrational, emotion-driven decisions.

 

 

What you can do next

If you have a strategic investment plan in place, you probably don't need to make serious changes ahead of an election, especially if you feel tempted to tinker because of how you feel about the potential outcome on an emotional level.

Footnotes

This is being provided for informational purposes and does not consider your personal investment objectives or financial situation. Since individual circumstances vary, contact a financial professional to address your personal needs.

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