Keep Politics Out of Your Investing Decisions!

These days, following an election can feel like watching the same slasher film every day for six months straight. But how should our political leanings impact our investing decisions? Specifically, should you sell before, during or after the election? While some might say that depends on who wins, I would take a different approach.

Two Clients Who Immediately Come to Mind

I remember receiving a call the morning after President Trump won in 2016 from a client who wanted to sell out of the market because he was sure President Trump would run stocks into the ground. After some conversation we agreed to look the other way on politics for a while and focus instead on his investing strategy, keeping the two parts of his life divided and keeping his assets in the market. Looking back, he would have kicked himself if he’d allowed his political views to leave him out of an amazing runup in equities following President Trump’s election: After the “Trump rally,” market performance during Trump’s term showed strong annualized returns of 11.1% per year, with data through Sept. 28, 2020.

On the other side of the aisle, I recall a client who was an avid supporter for President Trump and spent time standing by the roadside holding a Trump sign up for passing traffic (he was a pretty committed supporter). This client insisted on getting out of the market completely before the election because he believed Hillary Clinton would win and that the markets would be negatively impacted. In this case, the client missed the aforementioned equities runup completely, but for totally different emotional reasons than the first client. Not only was he frustrated that he called the election wrong (even though his preferred candidate won), he was upset about missing out on what ended up being amazing investing results.

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During former President Obama’s years in office, numerous folks I came in contact with sat entirely on the sidelines as investors. They were convinced that Obama would lay waste to the stock market and we’d be left in a pile of ashes. On the contrary, Obama’s term saw some of the most impressive stock market returns of any president in history, with cumulative returns of 181.1% and annualized returns of 13.8%.

So, once they exited the market, how do those investors ever get back in? Psychologically, it’s very difficult. The reality is that those who sell at the “top” have to make an extra decision: When do I get back in? That decision proves impossibly difficult.

How to Think Long-Term

If wise investors rightly realize that they should never enter the stock market without at least a five-year timeframe, why not ignore politics completely? The most recent market recovery following the COVID sell-off reinforces the “do nothing and look away” approach in dealing with events so far out of our control. We adjust our investing approach in response to events, but in no way would a wholesale exit be productive. All of this depends on the idea that you are comfortable with your allocation among markets to begin with. If that is in question, today’s lofty prices certainly provide an excellent opportunity to adjust, and an excellent opportunity to seek out a relationship with a financial adviser.

Recently, political pundits have been positing a unique scenario in which Trump wins in an apparent landslide on election night, only to be followed by weeks of mail-in ballot counting that wind up reversing the outcome much later. The question is whether traders will take advantage of this potential scenario to create “synthetic volatility,” a concept that describes volatility being created by traders that would not otherwise naturally exist. The reality is that we are all likely to have the outcome we want, if only for 15 minutes.

My Advice to Investors

I would strongly suggest to long-term investors (the only kind who should be in the market to begin with outside of professional traders) that they should do absolutely nothing to their otherwise sound investing strategies during this period leading up to the election. The reality is that long-term structural trends are likely to result in a mostly divided government for the foreseeable future, regardless of who wins the presidency.

If your investment strategy needs updating or the COVID sell-off freaked you out, you should by all means adjust. We don’t often get a chance to reclaim capital lost in a sell-off so quickly.

It’s always a good time to re-evaluate your underlying strategy and revisit alignment with long-term goals. If you feel lost and, perhaps for the first time, might need outside help, now is the time to take that step. With investment options expanding exponentially, it can be tough to filter out the noise without professional help.

If you want to invest in a way that is congruent with your values, I think that’s a great way to connect politics with investing. But to leave the field because you’re afraid the other team is going to dominate forever? I’d say that’s as crazy as the politicians we all criticize.