Should the Election Impact Your Investment Portfolio?

In less than a month, we’ll know who our next president will be and which party will control each of the houses of congress. Should investors make any changes to their portfolio in advance of the election or once the results are determined?

A number of clients have asked me versions of that question recently. Any time I get the same question multiple times from clients or readers, it tells me other people likely have the same question.

So my fellow Abundo Wealth advisor Jeremy Zuke addresses this question today. As the political commercials say, I support this message.

A Quick Disclaimer

This post is not an endorsement of either candidate in the upcoming presidential election. Nor is it an evaluation of any of their policy proposals. It is only about what is always in your control: the actions you take with your own portfolio and other financial decisions.

My hope is that you take away three key things from this article:

• A long-term outlook means not focusing on short-term events.
• Taking portfolio action based on predictions is an unhealthy investment practice.
• Businesses just keep making profits – if you stick around to earn them.

The importance of a long-term outlook

Over the course of a 30 year investing lifecycle, you will see a minimum of 4 presidential administrations and a maximum of 8. During those presidential administrations, history would strongly suggest you’ll also see periods of time where both major parties control the congressional bodies.

Over the last 30 years since 1994, we’ve seen 5 administrations and soon to be a 6th. Despite every election cycle causing concern from those whose candidate lost, the aggregate return of the S&P 500 during that time is almost 2,000%.

That’s not a typo. That’s 30 years of 10.43% compounded returns. If you prefer an inflation-adjusted view, the return is about 850% or 7.73% annually.

The scars of investing history often heal with time. It’s easy to forget that period of time included some truly terrible moments. 

• The dot-com crash and the 2008 great recession in particular combined to create an entire decade of zero returns. 
• There was 9/11/2001. 
• There was COVID-19. 
• Wars raged on multiple continents, some lasting over a decade in their own right.

Study after study points to the virtue of the Rip Van Winkle investor; the one who can sleep through everything without paying attention.

According to this awesome “Market Hindsight” tool from Vanguard, which measures the opportunity cost of going to cash, a Van Winkle stock investor who started with $1,000,000 in 1999 had $7,754,175 as of 8/31/2024. Someone who cashed out during the 2008 Great Recession ended up with $902,705.

Related: Reflecting on Tumultuous Times

Getting back in is very hard to do

Whenever you move money to the sidelines, you are inevitably faced with the decision of when to reverse course and buy back into the stock market.

There are two problems with this approach.

1. Everyday investors simply aren’t good at market timing.
2. If and when the market continues to go up, it’s a terrible psychological predicament for people who keep money on the sidelines. 

If you thought the market was too risky when it was 20%, 30%, 50% lower, how will you feel comfortable buying in after a further increase in price?

To make this concrete, during the first two years of the Trump administration, the market increased 37%. During the first two years of the Biden administration, it increased 52%.

The point isn’t to compare the two numbers. The point is that this allows people, regardless of party preference, to ask themselves how they would feel if they had gotten out of the market when a president they didn’t like was sworn in. It’s a serious predicament for investors who step outside the buy-and-hold paradigm.

Don’t forget: the market is forward looking

Stock market participants are always weighing future expected outcomes to determine the price of stocks today. The likelihood of specific candidates being elected, the anticipated impacts of their policy proposals, the perceived likelihood of those proposals becoming law, and opinions about future inflation, interest rates, demographic shifts are all baked into existing investor expectations and current stock prices.

Of course these are all probabilistic assessments and not a crystal ball into the future. But it tells us something about how investors perceive the expected future profits of businesses. And despite all the apparent chaos in the political news cycle, investors feel reasonably content with the future prospects of American business. Apple just keeps selling those iPhones, after all.

As long as our corporations continue to be profitable, long-term investors will reap returns. It may sound overly simplistic, but that’s why when you look back through the annals of political history you find returns have been positive no matter what people or party has held power for periods of time.

Warren Buffett’s mentor Benjamin Graham said, “In the short run the market is a voting machine, but in the long run it is a weighing machine.” What that means is that over long periods of time, there is a strong correlation between corporate profits and stock returns even though it doesn’t feel that way on a day-to-day or year-to-year basis where seemingly random price swings dominate the investing discussion.

Don’t tell the candidates, but they aren’t as important as they think

The President has much less direct control over stock market performance than they would like you to believe.

Sure, when things are going well they love to take the credit. And when things are going poorly, well that was the last President’s fault … or the Congress … or the animal spirits.

The reality is that there are many factors external to the president that drive economic returns. Congressional legislation is certainly important for the long-term economic health of businesses and society, but that’s often slow to change over the course of time and not always in lock step with the President’s beliefs or agenda. Innovation and profitability in the private sector are really the huge factors driving long-term returns.

Of course in the short-term, the biggest impacts of all – both positive and negative – tend to come from the events no one saw coming (the 30%+ decline from COVID-19 comes to mind).

That’s the nature of markets as I described above; since expectations are built into the price, then by definition the unexpected events are where the risk lies. One of the two major political party candidates being elected in a close election will definitely not count as a major surprise that no one saw coming.

Don’t try to front-run policy proposals

What political candidates say on the campaign trail (and even what they say once in office) frequently bears little resemblance to the actual legislation passed under their watch. You’ll hear big proposals for taxes, retirement plans, inflation, and economic investment.

Those plans are best viewed as negotiating positions. The candidates are sharing their visions for what an ideal world looks like to them, but they have to convince many others to go along with that agenda. During the process of compromise and bureaucracy, their core ideas are always reshaped in many ways.

We’ve seen many proposals that would eliminate the Backdoor Roth IRA, for example, and yet it is still here. Also, it’s not just whether or not something happens, but whom it impacts that matters.

The proposed tax on unrealized capital gains comes to mind here. Regardless of what you believe about the concept, any enacted policy is unlikely to apply directly to you because of the extremely high income limits.

Significant change is difficult to implement. The best approach is almost always to wait and see.

Have an asset allocation that suits your temperament

What if you have that bad feeling in the pit of your stomach about your stock investments? What if you just can’t help but focus on short-term returns (despite stocks being long-term investments)?

It is very possible that your tolerance for risk is simply lower than you once believed. (I personally think many investors overestimate their actual risk tolerance.)

If you find yourself persistently having these concerns about whatever the scary, negative, or controversial news item is at the moment, then it may be perfectly wise for you to be less aggressively invested. The key difference between this and market timing is this. If you’re going to make a change, I’m advocating for a permanent change.

You may have 80% in stocks now, but maybe you’d stop worrying so much about all this stuff if you moved to a 60/40 portfolio. There’s absolutely no shame in that.

In fact, matching your asset allocation to your personal need, ability, and willingness to take risk is the wise move. Learn that about yourself as early as you can, get set into an allocation you are comfortable with, and adjust plans if needed.

Keep existing biases in check

I’ve seen several studies floating around social media on the impact of different political parties on stock market returns. They tend to show that, in recent US history, the market has performed well under both Republican and Democratic administrations and that there has been a slight edge to Democratic ones.

I personally lean heavily into the first finding; that our businesses do well under a wide range of conditions. And I would urge extreme caution in the latter finding, that we can predict performance based on political party – especially over such a small sample size and with many possible explanatory factors.

This is, after all, one of the biggest problems investors face with regard to politics: it always happens to be when the other team is in power that everything seems like it will go poorly.

As Larry Swedroe puts it: “Many investors are unaware how their political biases can impact their investment decisions (usually with negative results). My experience has been that Republicans were much better investors during the Bush administration, and Democrats were much better investors during the Obama administration. The reason is that when the party they favored was in power, they tended to be more optimistic. That led to a more disciplined investment approach, which helped them avoid panicked selling.”

A Final Word

Okay, I’ll mention the candidates once only to wrap this into a final point. These two current candidates have been either the President or Vice President of the United States since January 20, 2017. On that date, the S&P 500 was at 2,267. As of October 17th, 2024 it is at 5,864.

Watch the news to be an informed citizen. But turn it off when they start forecasting doom and gloom.

And especially turn it off if the doom and gloom forecast conveniently aligns with your existing views. Their crystal balls are terrible, and what they want primarily is clicks and eyeballs.

“Don’t do something, just stand there!” – John Bogle

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to chris@caniretireyet.com. Financial planning inquiries can be sent to chris@abundowealth.com]

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