Don't Let the Election Derail Your Investment Strategy

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published 22 October 2024

As the U.S. presidential election approaches, it’s natural for investors to feel a surge of anxiety about its potential impact on their portfolios. With heightened media attention and the constant drumbeat of predictions, it’s easy to believe that the outcome of the election will dictate market movements. However, history tells a different story.

In reality, while elections bring volatility, they rarely determine long-term market performance. So how should you, as an investor, navigate the political landscape and protect your portfolio from the noise? Here’s what you need to know.

Uncertainty: The market’s greatest challenge

Elections are synonymous with uncertainty, and markets notoriously dislike uncertainty. This year’s race is shaping up to be one of the closest in decades, which could contribute to market volatility in the short term. However, investors should avoid knee-jerk reactions based on political headlines.

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Historically, markets have shown remarkable resilience during election years. In fact, data shows that since 1970, the S&P 500 has delivered an average return of 11.6% during election years — outperforming the average annual return of 9% to 11%. This illustrates a critical point: The best course of action in the face of uncertainty is often to stay invested. Trying to time the market during volatile periods rarely pays off. Missing just a few of the best-performing days can significantly reduce long-term gains.

Does the party in power matter?

A common misconception is that the stock market performs better under one political party than the other. However, when we analyze decades of market data, we find no clear correlation between party control and stock market performance. Whether a Democrat or a Republican is in office, the stock market has historically generated positive returns over time.

A cold, calculating market

It’s important to remember that the stock market is not driven by ideology or political promises. At its core, the market is a mechanism for valuing companies based on their future earnings potential. It’s a cold, calculating entity that cares about corporate profits — not policy debates.

When a new president is elected, markets quickly adjust to any anticipated policy changes, factoring in their potential impact on company earnings. Whether the issue is taxes, tariffs or regulations, the market’s primary concern is how those policies affect corporate profitability.

In some cases, policies that seem harmful to certain sectors may already be priced into stock valuations before they are even implemented. Meanwhile, companies have proven time and time again that they can adapt to changing regulations, innovate and find ways to thrive regardless of the political environment.

Focus on the fundamentals

While elections may dominate headlines, they are just one of many factors influencing the market. Global economic trends, interest rate changes, corporate earnings and consumer behavior all play a far more significant role in determining long-term market performance.

Conclusion: Don’t let the election derail your strategy

The U.S. election may add an extra layer of uncertainty to the market, but it’s important not to let it derail your long-term investment strategy. History has shown that markets reward patient investors who stay the course, regardless of political outcomes.

Rather than reacting to political headlines, focus on the fundamentals: a diversified portfolio, a clear financial plan and the discipline to remain invested through volatile periods. By doing so, you’ll be better positioned to achieve your financial goals — no matter who sits in the White House.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Stacy is a nationally recognized financial expert and the President and CEO of Francis Financial Inc., which she founded over 20 years ago. She is a Certified Financial Planner® (CFP®), Certified Divorce Financial Analyst® (CDFA®), as well as a Certified Estate and Trust Specialist (CES™), who provides advice to women going through transitions, such as divorce, widowhood and sudden wealth. She is also the founder of Savvy Ladies™, a nonprofit that has provided free personal finance education and resources to over 25,000 women.