5 Key Signs You Should Worry About Your Investments in an Election Year

01/07/2024

Young woman using a laptop while working from home

By and large, the pen strokes of presidents, and even Congress, don’t make or break your portfolio. Before you object that “this time is different,” consider that every impassioned voter for the last few hundred years has said the same thing, and they were (mostly) wrong.

Learn About: 3 Types of Investments Predicted To Plummet in Value in Summer 2024

For You: 7 Reasons You Should Consider a Financial Advisor — Even If You’re Not Wealthy

That said, some investors do have more exposure to political turmoil than others. So how can you tell if you should think twice about your portfolio in an election year?

1. High Exposure to Stock Market Volatility

First, don’t panic. A study by T. Rowe Price found that presidential elections have little correlation with stock market volatility. In most cases, financial markets actually see less volatility around presidential elections.

The marked exception is the one month following a presidential election. Brian Meiggs, founder of My Millennial Guide, observed that “Increased market volatility is common in the immediate aftermath of an election. Significant fluctuations in stock prices can signal investor anxiety, but little else.” Day traders should take note of that volatility, as should anyone else who has short-term investments and is at risk of being forced to sell stocks in that period. But everyone else should just keep holding long-term.

As for actual stock market returns, U.S. stocks have performed a little weaker during presidential election years — but not by a worrying margin. The T. Rowe Price study found that the S&P 500 returned 11%, on average, during election years, versus 11.6% during other years.

Coming full circle: don’t panic.

Check Out: 5 Presidents Who Raised Taxes the Most, and 5 Who Lowered Them

2. High Exposure to Recession Risk

The same study did find something more salient about election cycles. The risk of a recession is far higher in the 12 months following a presidential election than in other years.

Specifically, a president’s first year in office comes with a 54% chance of recession, compared to 29% for the second year in office, 17% in the third year and 25% in election years.

Recessions happen, and they don’t pose a huge return risk for the average person simply investing for retirement and holding long-term. But if you’re an entrepreneur in a recession-vulnerable business, for example, and much of your net worth is tied up in your business, that could spell trouble for you.

Take extra caution to protect against the effects of recession if you’re extra vulnerable to them.

3. High Exposure to Tax & Policy Changes

Some industries have more exposure than others to tax changes or specific policy changes.

“Policy uncertainty can impact specific sectors,” noted Meiggs. “If you’re heavily exposed to one of those sectors, it’s important to monitor political developments and their potential economic implications.” For example, real estate investors saw major tax benefits from changes to bonus depreciation in the Tax Cuts and Jobs Act of 2017, President Trump’s signature legislation. Bonus depreciation has already started phasing out and is likely to either sunset or renew based on who wins the Oval Office.

4. High Exposure to Geopolitical Risk

Some presidents and candidates run on preserving the geopolitical status quo, while others run on shaking it up.

“Geopolitical tensions that often accompany elections can create additional risks,” noted Meiggs. If your portfolio is vulnerable to geopolitical risk, pay extra attention in election years. Consider reducing your exposure, or at least preparing to do so, if a particularly unpredictable president wins the race.

5. You’re Postponing Saving & Investing

The greatest risk to your portfolio is you, not the president or Congress. Your own savings rate and participation in the market matter far more to your long-term wealth than policy changes in Washington.

“If you are worrying about your strategy, you are a long-term investor in name but not in practice,” warned Certified Financial Planner Mark Higgins. “After studying 234 years of U.S. financial history, it became very clear that presidential politics plays a much less significant role in the evolution of the U.S. economy and financial markets than most people believe.

“When writing my book, ‘Investing in U.S. Financial History,’ there were only three U.S. presidents that warranted more than a few sentences. These were Andrew Jackson, Franklin D. Roosevelt and Lyndon B. Johnson. But even in these cases, it was impossible to predict why they would be so impactful,” noted Higgins.

A Parting Parable

Dr. Robert Johnson, CFA and founder of Economic Index Associates, shared a cautionary tale about letting your political passions get the better of your investment reasoning.

“At a previous employer, I worked with a colleague who was convinced of two things — first, that Hillary Clinton was going to win the 2016 presidential election, and second, the stock market was going to crash. So, he sold completely out of stocks and went to cash prior to the election.

Dr. Johnson continues, “Of course, Trump won, and subsequently, the stock market performed very well early in his tenure. My colleague then bought back into stocks after the market had rallied following the election. Then the pandemic hit, and the stock market declined precipitously. Of course, my colleague sold back out of stocks near the nadir. “Once again, markets rallied following the pandemic. Suffice it to say, his attempts at market timing were wealth-destruction moves.” Don’t try to time the market, don’t try to get too cute or clever. And most of all, don’t panic.

OTHER NEWS

7 hrs ago