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SubmitElection Fears
Two things they say you should avoid around holiday dinners are politics and religion. These are contentious subjects, to be sure, and when it comes to how we view our money, the first can often impact the decisions we make. The question is, as we enter a heated Presidential election in 2024, should it?
As a thought experiment, if we looked in the rearview mirror and only invested while our party (Democrat or Republican) held the Presidency, we would have wildly underperformed the person who took no action regardless of administration. Our friends at BlackRock looked back to 1953. They found that staying one-sided would have cost you 90% of your gains. That’s for both parties.
So, if it isn’t the party that matters – should we worry when elections happen? One theory on market volatility (or lack thereof) is that uncertainty roils markets. Said another way – when the Presidency and Congress control may completely switch from one party to another, the business outlook may be significantly different. Often, when one party controls multiple branches of Government, the largest policy changes can occur. For investors, this means uncertainty around business prospects and, thus, their investments. You might say this could cause more buying and selling than usual. Our friends at T. Rowe Price deeply investigated volatility and performance during election years. Their data seems to support some of that thesis. Looking at the S&P500 index data back to 1928, volatility is meaningfully higher in the year before an election and right up to the election and gradually recedes in the 1 year after.
Investors re-adjusting to business prospects can happen for a number of reasons, but elections sure seems like it could be one of those things that in the short-term may cause more bumps in your portfolio than usual.
So, should you make decisions around election periods? Often the right approach to investing means a combination of different things. In this case, we don’t want to completely divest to avoid the other side of the aisle. Clearly, that will cause more harm than good. Second, if more volatility occurs – this could be an opportunity to take advantage of markets, invest new cash, execute tax moves, re-position, or utilize the dry-powder investments we’ve saved for a rainy day anyways. For most people, this should represent an opportunity to continue to build your wealth on a well-executed plan in the short and long-term and not incorporating our personal views with well laid investment plans.