Do elections influence investments, retirement planning?
We hope everyone has stayed safe and healthy as summer comes to a close. Without question, 2020 has proven to be a difficult year in more than one way. However, through difficulty we find resiliency, and we hope that all of you continue to move forward one day at a time. As we move into the back half of 2020, there are some very important question marks that remain unanswered: economic recovery, COVID-19 remedies, and the 2020 Presidential Election. In this month’s issue, let’s look at investing in election years. More specifically, what it means for you as an investor, and some common mistakes made during election years.
Politics remains an always-polarizing subject in our country
At times, elections leave us with an eerie feeling that everything hangs in the balance. As politicians highlight the issues we face inside our country, it can be easy to grow pessimistic. It begs the questions of, “How much can an election impact my investments and retirement planning?” There are a few things to keep in mind when thinking on this popular question.
- First, it is imperative to remember that retirement planning is a long-term strategy. By maintaining a long-term mindset, you put yourself in a better position to continue building a better retirement.
- Second, investors who stay fully invested throughout election years outperform those who sit on the sidelines.
- Third, only two of the previous 20 election years have yielded negative returns – 2000 and 2008. In both years market declines can be primarily attributed to asset bubbles (technology, housing) instead of politics.
As the election season ramps up into full gear, one of the questions we have been getting often is which political party is better for the market? This is an interesting question and thankfully it’s a question we (investors) have plenty of data on. We want to reiterate the importance of maintaining a long-term investment strategy because historically it has not mattered who is in the White House. The stock market has trended upwards over time while paying little attention to who the president is.
The accompanying chart from American Funds by Capital Group looks at market returns and illustrates the market movements while both Republicans and Democrats are in office. As you will see, the market continues to go up regardless. The moral of the story is stay invested regardless of who is in the White House.
As we mentioned, investors tend to grow pessimistic in election years. As emotions run high in the political arena this attitude consistently shifts to investors. This results in many investors allowing their emotions to interrupt their long-term investment plans. As those emotions boil leading up to elections, we have seen investors dump massive inflows to money market funds and cash. Interestingly enough, the year following elections consistently sees a high amount of inflows into equities. This tells us that investors attempt to time the market during election season. There are two common mistakes being made at the same time. First, investors are trading on emotions and, secondly, investors are consistently attempting to time the market, which rarely results in a winning strategy.
To review, during election season stay committed to your long-term investment strategy. This should align with your long-term goals, time horizon, and investment purpose. The stock market has consistently had positive returns regardless of whether a Republican or Democrat was in the White House.
Attempting to time the market is very difficult and is very rarely a winning strategy. Those who stay fully invested have outperformed those who sit on cash on the sidelines during election years. Remember to reach out to your plan advisor or investment advisor if you have concerns or questions surrounding your investments. Election years bring everyone a degree of stress… remember to breathe.
Article Written By David and Vance Wentz
DAVID WENTZ is CEO of Tax Favored Benefits, Overland Park, Kansas. Wentz is a graduate of the University of Kansas School of Law with a Juris Doctor degree. Wentz frequently speaks at various professional and business seminars about pensions, profit sharing, 401(k) plans, tax favored benefits, and investment programs. Western Equipment Dealers Association endorses Tax Favored Benefits as a 401(k) provider. No compensation is received. More information is available at www.taxfavoredbenefits.com.