There is no doubt that the pandemic has wreaked havoc on the economy and the financial markets, and with all of the uncertainty in the world, do we really need another thing to worry about? Welcome to the 2020 presidential election. Over the past several months, I’ve been getting more and more of this question, “What should we do to prepare our investments for the election?” Now before we get into that, let’s first address the myths:
Myth #1: The party in the white house dictates the performance of the market.
Myth #2: One should sell out of risky investments just before the election.
Myth #3: Election years are a bad time to invest because of excess volatility.
According to a recent historical analysis, stock market returns have been positive in 19 of the past 23 election years from 1928-2016, no matter which party has been in office. In fact, the S&P 500 has experienced an average return of 11.3% during an election year, demonstrating that the data doesn’t support the headline stirring hysteria that one candidate or the other spells disaster for the stock market. Two things ring true: 1) Past results do no guarantee future performance, and 2) although markets can seem unpredictable in the short-term, in the long term there has been historical evidence that the markets continue to grow. Since it is impossible to time the markets – following Myth #2 or Myth #3 is typically a losing proposition.
What leads to the hysteria every presidential election cycle? It is called “fear” my friends! What can we do about it?
Don’t Let Your Emotions Drive Your Investment Decisions
It bears repeating that it’s extremely difficult if not impossible to time the markets. If you decide to make a drastic change to your investment strategy due to that fear, then you must still wrestle with the decision of where to put your money while you wait it out and then when to decide to get back into the market. Due to this very dilemma, studies show that the average investor has earned a measly 1.9% annual return between 1999 and 2018. If you want to get an idea of the scary results that this might produce on your long-term planning, try running a retirement estimate like this one and substituting the average market return with the return of an average investor. Hint: It is not pretty!
Step 1: Remember it’s all about you so ask yourself these questions.
What are you investing for? How many years do you have to save for that goal? How many years will you need the money to last once your need starts?
Step 2: Take a risk tolerance questionnaire.
Take a risk tolerance questionnaire to make sure you have the right amount of your portfolio in stocks, bonds, and cash based on your time frame and comfort with risk. The key is to have a portfolio that minimizes the chance of having to sell during a down market and that you can stick with while still being able to sleep well at night. If you are a more hands on investor and have already done this, you may want to rebalance your investments by moving money out of areas that have outperformed and into areas that have underperformed in order to restore your target percentages in each investment category.
By doing that at least once a year, you’re automatically selling relatively high and buying relatively low, the opposite of what most investors do. This is all part of having a smart investment process – more on that here. The great Warren Buffett has said that his basic investment strategy is to be greedy when others are fearful and fearful when others are greedy.
Step 3: Determine if you want to be a hands-on or a hands-off investor.
How involved do you want to be with your investments? There is a key litmus test which I call the “Will, Skill and Time” test. If you don’t have the will, skill and the time to pick your own investments and rebalance your portfolio on a consistent basis then consider being a hands-off investor.
One-stop funds such as target risk funds or a target date fund can do the heavy lifting for you. The former is geared towards a certain risk level (conservative, moderate, or aggressive) so you may want to switch to a more conservative fund as you get closer to retirement. The latter becomes more conservative as you approach the target date, but you may want to pick a later date if you want to be more aggressive or an earlier date if you want to be more conservative. Since everything would be in one fund, you may be less tempted to sell it than if you had the more volatile components of it.
Alternatively, you can explore the world of managed accounts. You can evaluate the options offered through robo-advisors or hybrid models, which use live advisors coupled with a robo-advisor, or a more traditional managed account model, where your investments are managed by a team of professionals for a fee. Just be sure to understand how each of those options work and the fees associated with each before you proceed.
Step 4: Be invested and stay invested.
The important thing is to determine what the right balance of stocks, bonds, and cash is based on your time frame and comfort with risk. Then pick the right way to invest according to your preference for being hands on or hands off and stay focused on that goal. If your portfolio was built around your long-term goals (as it should be), a short-term change in markets shouldn’t matter. When it comes to investing during a downturn, the answer is often not to do something and maybe avoid checking your accounts too much. If anything, you might just get excited about the opportunity to buy investments “on sale” the next time you contribute to your 401(k) plan or rebalance your portfolio.
Step 5: Ignore the chatter.
Call it the cooler talk (now maybe the Teams or Zoom side chats), the Twitter feed, the news headlines or your omniscient neighbor. Try to just tune it out and remember to follow the simple process outlined here. You’ll be well on your way towards your investment goals and even be more at peace no matter who gets elected into office.