Investing

Markets get jumpy around presidential elections: Here are 3 good reasons to stay calm

Experts advise that your long-term investment rules don’t change regardless of who’s in office.

Twenty/20

It's normal for people to be nervous about their investments in a U.S. presidential election year. Even without a pandemic, markets tend to be jittery in the period surrounding an election. But just as you shouldn't grocery shop when you're hungry, it's also smart not to make long-term investment decisions based on how you feel at the moment.

Here are some good things to keep in mind that might allay your investment fears before, during, and after the November 3 election.

1. Markets tend to go up over time, period

One of the most stunning facts about the market indexes is that they tend to go up. In 1960, the S&P was at 58.11 and the Dow was at 615.89. In 2019, the S&P was at 3230.78 and the Dow was at 28,538.44.

The upward-sloping line isn't without some scary peaks and valleys, but the trend, over time, is clear. And no, it's not because of inflation: From 1960-2019, the value of the U.S. dollar rose by only about 754%, whereas the S&P rose by 5,460% and the Dow, by 4,537%.

The last several decades have included several disasters, including Black Monday in 1987, the dot-com crash of the early 2000s, the subprime mortgage crisis that started in 2008, and, in 2020, the downturn during the lockdowns of March and April. But after all of those events, the markets recovered. Step back and you'll see that keeping money in the market tends to pay off over the long run. 

Let's take this past year. The S&P went up 11.29% between October 26, 2019, and the same date this year.

Even with the pandemic, if you had invested in a fund tied to the S&P, you'd have made a handsome double-digit return. But only if you'd held on to it.

Doing that isn't always easy. Fully 42% of polled investors sold at least one stock when lockdowns drove markets down in March, according to a recent survey from MagnifyMoney. That means a lot of people missed out on an all-time record high for the S&P on August 18.

2. Markets have gone up during nearly all presidential administrations

The markets' upward trend persists throughout nearly every presidential administration. Since World War II, only two U.S. presidents, Richard Nixon and George W. Bush, have left office with the S&P level lower than it was at the beginning of their term. 

"Democratic and Republican administrations will trade hands many times," says Neal Solomon, a Certified Financial Planner (CFP) and managing director of WealthPro, LLC, in Saratoga Springs, New York. "Don't let the daily news distract you from the long term."

3. Fear is often exaggerated in election years

"During a campaign, both sides try to convince you that if the other side wins the world will end,"  says Solomon. "The world is not going to end." 

Many financial professionals say it's common for clients to get cyclical worries every four years. "In 2016, I got panicked breathless calls saying, 'Oh my God, Trump is going to destroy the economy, I'm going to exit the market right away,'" recalls Jamie Cox, managing partner of the Harris Financial Group in Richmond, Virginia. "But then the markets shot up for the next eight months. You'll [see] a similar effect on the markets no matter who wins the election."

An old saw in the investing world is that if you think a Democrat looks likely to win a presidential election, you should offload your stocks beforehand, because Democrats usually raise capital gains taxes. By the same logic, if the Republicans look set to win, then buy. But just because something seems intuitively as if it should be right doesn't make it factually accurate.

Don't let the daily news distract you from the long term.
Neal Solomon
CFP

To be sure, the Democrats and Republicans have different fiscal policies. For example, "Biden has pledged to raise corporate taxes," as Solomon points out. If that were the end of it, someone who thinks Biden looks set to win might feel tempted to sell. 

On the other hand, Solomon notes, when it comes to PPP loans and other social benefits, Democrats are likely to allocate more funds. Business loans have the potential to increase the GDP and possibly the stock market along with it.

Both candidates, in other words, have some policies that could juice the economy. Solomon notes that there are so many diverse fiscal policies that it's hard to calculate which candidate the markets will favor. Essentially, the candidates' policies cancel each other out.

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So what is an investor to do?

1. Don't make any sudden moves

When you're about to choose the next leader of the free world, it's normal to wonder whether everything as you know it will change. This is not a good frame of mind to be making investment decisions that will affect your long-term goals, like growing your wealth.

Recognize that, right now, "we're not rational," says Marguerita Cheng, Certified Financial Planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

In an election year, says Cheng, "we have different biases that contribute to poor decision making. First, there's your recency bias. If you see in the morning news that the market is down, that's what's recent in our minds. That might cause us to want to sell. But for mutual funds, this is problematic. If the market opens down and you put in your sell at 10 a.m., that trade isn't executed till 4 p.m."

By that time, the market might have taken a different direction. That's a good reminder that "you can't make decisions based on what you hear in the short term," says Cheng. 

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Another bias, says Cheng, is availability bias, meaning that you form beliefs based on the information available to you and the people closest to you, even if that information isn't consistent with the overall trend. "If you knew someone who lost a lot of money in the stock market, you are wont to bail."

Not all mistakes are fully fixable, she adds: "If you get out of the wrong time, you're not going to allow the market the chance to recover."

Cheng strongly advises her clients to stay calm during times of certainty. "Sometimes the hard part of investing is staying invested."

2. Make sure you're diversified

Elections can make investment decisions even more confusing than usual. But the decision might be much simpler than you think. Cox says, "If you're already diversified, don't do anything. If you're not diversified, then diversify."

Diversifying your portfolio is key regardless of who wins an election, Solomon says. "Democrat and Republican administrations will trade hands many times. It's more important to focus and not let the daily news distract you from the long term. There will always be daily news."

Solomon's general advice to clients is: "Focus on the doughnut, not the hole. And the doughnut is building wealth over time."

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