5 Investing Questions During an Election
The Donald Trump vs Joe Biden presidential race comes to a head this November in what will be one of the most dramatic elections in history. Half of the country will think the end of the world is sure to come and the other half will celebrate four coming years of prosperity.
While the truth probably lies somewhere in the middle, it’s easy to get emotional when it comes to your investments in an election year. Although no one has a crystal ball to predict what will come next, a look back at history can give us some direction to a few common questions.
1) Are elections good or bad for the market?
The changing of the guard is an essential aspect of our democracy. The graph shows each year of the election cycle and whether stocks tend to have positive or negative returns. As you can see, stocks are positive more than they aren’t in all years but especially in pre-election and election years.
2) Are Republicans or Democrats better for the market?
Overall, the economy and market has continued to perform regardless of which party is in the White House. The free market system has an amazing ability to adapt and overcome different obstacles, tax structures and regulatory environments. The graph below shows the cumulative and annualized return during each presidency and whether they were Republicans or Democrats.
3) How have market returns been during elections?
It is common to see a slowdown in the market if an incumbent party loses. The causation of the president losing his seat could easily be a result of the struggling economy. Post-election we tend to see strong markets no matter who wins.
4) If politics doesn’t drive the market, what does?
When it comes to understanding markets and putting together an investment strategy it very well might be more important to look at the actual state of the economy and where we are in the business cycle as opposed to a singular focus on who will win the president seat.
5) How do I invest through the uncertainty?
Trying to outsmart or time the market is extremely difficult to near impossible. The graph below shows us the brutal impact that missing the best days in the market can have on on your portfolio over time. Study after study shows us that generally the best course of action is to have a diversified portfolio and to stay invested!
As you become or remain a long-term investor; elections, viruses, wars, economic cycles, and market crashes will come and bring uncertainty. While these events hurt in the short term, they can be managed and worked through for an investor.
Understanding where and how you are invested is important. Having a well diversified portfolio that has been constructed not for the short-term but for the long-term is the key.
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