Navigating Market Changes During Election Years
/By Kelly Doyle
As the United States approaches another presidential election, it's natural for concerns to arise about how political changes might affect your investment portfolio. The anticipation and uncertainty surrounding such events can lead to anxiety and even irrational decision-making.
Media coverage and social media discourse tend to amplify during election years, creating heightened negativity and fear. This leads some investors to make emotional decisions instead of sticking to their long-term plans. It’s essential to remember that history often serves as a valuable guide in times of uncertainty, as does recognizing our own behavioral biases when making investment decisions.
Past Elections
Americans have been voting in elections every four years since 1788. While drama surrounding recent elections has sparked volatility in financial markets, this is not a new occurrence. In fact, tension between political rivals has led to turbulent outcomes for centuries.
Take the election of 1800, for instance. This event was so contentious that, three years later, it led to former treasury secretary Alexander Hamilton and then Vice President Aaron Burr facing off in a duel. Tragically, this heated dispute ended with Hamilton taking a bullet to the abdomen and dying the next day. It makes me feel grateful to live in the 2020s, and not the dueling 1800s, where we mostly use words rather than weapons to resolve disputes.
The chart below, prepared by Dimensional Fund Advisors, helps put things into historical context. Note that, despite the ever-present, short-term volatility, the markets tend to tick up regardless of the party in office.
Understanding Behavioral Biases
When considering possible outcomes of the upcoming November election, it’s important to acknowledge that we all carry different behavioral biases. Behavioral finance, the study of why investors make decisions the way they do, has been a growing field in recent years.
The list below outlines some of the common biases that many of us carry. Understanding these different biases can help us acknowledge when we exhibit a bias, allowing us to stop and reflect before acting on it.
Confirmation Bias
This occurs when individuals seek out information that confirms their existing beliefs or fears. During an election cycle, people may gravitate toward news sources or opinions that align with their political views, potentially leading to a distorted perception of the situation. Selectively choosing which information to use can lead to a lack of diversification and investments that are too risky. Try shifting your focus away from short-term market moves and instead lean toward your long-term investment goals to help mitigate your confirmation bias.
Loss Aversion
Investors tend to feel the pain of losses more acutely than the pleasure of making gains. Fear of potential market downturns driven by election outcomes can lead to a desire to sell investments prematurely, causing investors to miss out on potential future gains. An example of this would be to sell all investments and stay in cash during a period of volatility due to a fear of a loss in the market. The risk of this type of behavioral bias is that time spent out of the market could be a loss in potential gains.
Recency Bias
This bias causes individuals to place undue emphasis on recent events when making decisions. In the context of elections, investors may overreact to short-term market movements without considering the long-term fundamentals of their investments. People entering the work force during the decade-long bull market from March 2009 to February 2020 may suffer from Recency Bias as they have only known a really strong economy during their working years. As a result, they may not understand the importance of a diversified portfolio for downside protection.
In truth, diversification is the key to combatting recency bias and avoiding the lure to either go all in or all out on specific sectors or asset classes. Awareness of this bias promotes a more balanced investment approach, weighing both short-term fluctuations and long-term objectives.
Staying the Course
Despite the uncertainty surrounding elections, it's essential to maintain a long-term perspective and adhere to a well-thought-out investment strategy. Following the strategies below can help you navigate the upcoming election cycle.
Focus on Long-Term Goals
An election year is 365 days long while a presidential term is four years. Your investment horizon is far, far longer than that.
Revisit Your Investment Policy Statement
An Investment Policy Statement can be robust and formal or as simple as a back-of-the-napkin plan. Either way, it serves as a strategic guide to the planning and implementation of your investment plan. While reviewed frequently, this statement typically is only changed due to a major life change or event. It serves as a “true north” in times of rough seas, where the investor can open it up and remind themselves of why they invest the way they do.
Diversify Your Portfolio
A diversified portfolio can help mitigate the impact of political uncertainty on your investments. Many different types of risks on a macro scale are involved when investing, such as purchasing power risk, reinvestment risk, and interest rate risk. A proven strategy is to spread your assets across various geographic areas, asset classes, and sectors to help reduce risks associated with election-related volatility.
Stay Informed, but Beware of Overload
Stay informed about political developments and their potential impact on the economy and markets. Keep in touch with friends on social media but take some healthy time away as well. Be wary of information overload and avoid making quick reactions based on sensationalized headlines.
Consult with Your Financial Planner
Your financial planner is here to provide guidance and support during periods of uncertainty. Reach out to discuss any concerns you have and ensure that your investment strategy remains aligned with your long-term goals.
In conclusion, while the upcoming presidential election may introduce short-term volatility into the markets, it's essential to maintain perspective and avoid succumbing to behavioral biases. By focusing on fundamentals, diversifying your portfolio, and staying informed, you can navigate through the uncertainty with confidence.
As always, if you have any questions or concerns, please don't hesitate to reach out to us. We're here to support you on your financial journey.
Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Investing involves risks. Wealthrise Financial Planning is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. It should not be considered investment advice or an offer to buy or sell securities.
