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Written by: Patrick Durst, CFP® | Front Range Financial
As a Certified Financial Planner (CFP®) who has had this conversation with my clients countless times, I have often seen clients become anxious about their investments, particularly during election years. The political uncertainty, media noise, and polarized opinions can create a whirlwind of emotions, leading many seasoned investors to make hasty, and often irrational financial decisions. However, historical data and expert insights suggest that investors may be better off staying the course rather than reacting to election-driven market volatility.
Election Year Market Performance: What History Tells Us
It's natural to wonder how elections impact the stock market, and rather than moving some or all your investments into cash, let’s look at the data in an election year. A common misconception is that election outcomes will dramatically sway the market's performance in either direction. However, most election years result in positive market returns, whether a republican or democrat wins office (Election Year Returns Chart). Over the past century, the S&P 500 index has delivered positive returns in 19 out of 23 presidential election years, with an average return of about 7.5% (JP Morgan Private Bank)
Moreover, BlackRock's analysis points out that markets tend to focus more on broader economic factors—such as corporate earnings, interest rates, and inflation—than on who is in the White House. The market’s long-term growth trajectory often overshadows the short-term fluctuations that elections might cause (BlackRock).
So, what does this mean for you? We expect a higher (and often positive!) return on our stocks even in an election year, but because one can never predict the timing of these often-positive returns, it’s important to have an adequate safety net of cash and equivalents to draw from to move past the short term volatility.
The Pitfall of Emotional Investing
One of the biggest mistakes investors can make during election years is letting emotions drive their investment decisions. The media amplifies political drama, creating a sense of urgency or fear that can lead to impulsive actions. J.P. Morgan's insights remind us that attempting to time the market based on election outcomes is a risky strategy. The short-term volatility often associated with elections usually corrects itself as the market absorbs the results and refocuses on economic fundamentals.
I advise clients to avoid making drastic changes to their portfolios based on election-related concerns. Instead, maintaining a diversified portfolio aligned with your long-term financial goals is usually the best course of action. Diversification helps mitigate risks by spreading investments across various asset classes, sectors, and geographic regions, ensuring that no single event—such as an election—has a disproportionate impact on your financial well-being.
Policy Changes and Their Impact on Investments
While the market as a whole may not react dramatically to election outcomes, specific sectors can be more sensitive to policy changes. For instance, a shift in administration might bring changes in tax policies, healthcare reforms, or energy regulations, which can affect certain industries more than others. Understanding these potential shifts can help you adjust your portfolio to take advantage of opportunities or mitigate risks.
J.P. Morgan highlights that it's important to monitor the policies proposed by candidates rather than the candidates themselves. Investors should focus on how proposed policies could affect their investments rather than getting caught up in the political rhetoric (J.P. Morgan Private Bank) For example, if a candidate is advocating for increased infrastructure spending, sectors like Industrials, Utilities and Materials can be affected.
Strategic Adjustments: When and How
While a long-term approach is generally advisable, there are scenarios where strategic adjustments to your portfolio might be warranted. If a specific policy proposal directly impacts an industry you're heavily invested in, and having an adverse outcome would impact to your financial health, it may be prudent to reassess your exposure to that sector. Additionally, if tax policies are likely to change, considering the timing of capital gains or losses can be beneficial.
However, these adjustments should be made cautiously and with a clear understanding of your overall financial plan. It's not about reacting to every headline but rather making informed decisions that align with your long-term goals.
The Bottom Line: Stay the Course
Election years bring uncertainty, but they also bring opportunity. The key is to stay focused on your long-term financial objectives rather than getting swept up in the political noise. Historically, markets have weathered the storms of election years, often emerging stronger on the other side.
As a CFP® professional, my role is to help clients navigate these turbulent times with confidence. By staying disciplined, maintaining a diversified portfolio, and making informed adjustments, when necessary, you can keep your financial plan on track—no matter who wins the election.
Remember, investing is a marathon, not a sprint. The ups and downs of election years are just part of the journey. By keeping a long-term perspective, you can weather the storm and stay on course toward your financial goals.