And How to Avoid Them
Presidential election years are stressful for many Americans, and 2024 is no different. Regardless of which side of the political aisle you fall on, you may face strong emotions as we near November. However, it’s important to not let these emotions drive your investment decisions, as fear-driven investment moves have the potential to significantly derail your investment progress over time.
Following are three common mistakes investors make in election years, as well as tips to help you avoid them.
Mistake #1 – Selling out of equities when a preferred candidate loses
Recent analysis by UBS using Consumer Sentiment Index data from September 2006 to May 2024 found that investors potentially sacrifice as much as 57% in returns over a 20-year period when they make a politically based decision to take money out of the market following an election.1
If we zoom out even more, we find that investors who missed out on the 10 best days of S&P 500 performance in each decade would experience a return of 91% — that’s compared to a return of 14,962% for investors who remained invested throughout all market volatility, as illustrated in the chart below.2
The chart above shows how returns would compare over the last nine decades if you stayed invested versus missing out on the 10 best days per decade (S&P 500 Index, percent total return).
Although it may feel like the beginning of the end when your preferred candidate loses the election, historic data tells us that’s simply not the case. Consider the table below, which shows the compound annual growth rate (CAGR) of the S&P 500 Index under each president since 1957.
Notice that under Democratic presidents, the S&P 500 Index had an average return of 9.8% and a median return of 8.9%. Under Republican presidents, it returned an average of 6% and a median of 10.2%.
When we compare the threat of missing out on just a few strong market days to the nominal impact different political parties have historically had on market performance, it becomes clear that investors are wise to resist the urge to sell out of equities when an election doesn’t go the way they’d hoped.
Tip – Remember markets are resilient. The person in the Oval Office is just one of many factors that impact market performance, which is why it’s important to stay the course by investing in a strategic, diversified portfolio designed to weather all stages of the market cycle as well as periods of political uncertainty.
Mistake #2 – Buying into negative political rhetoric
Presidential campaign strategies often try to scare Americans away from voting for the other candidate. This practice can lead to a heightened sense of fear and uncertainty, making some investors worry the sky is falling, so to speak. However, it’s important to resist the urge to act impulsively based on fear.
Keep in mind that the health of your investment portfolio depends on your ability to make rational, long-term decisions. Making impulsive moves, such as buying at market peaks or selling during a downturn, has the potential to derail your investment progress for years into the future.
Tip – If you find yourself getting nervous about your investments, pick up the phone and call your wealth manager. They can help you determine if your fears are warranted. If they are, you can work together to make appropriate adjustments to your portfolio. For example, strategies such as opportunistic rebalancing, mean regression trading, tax-loss harvesting and diversification are investment-friendly ways to address your concerns without tanking your future return potential.
Mistake #3 – Being too conservatively allocated
During periods of uncertainty, some people adopt a “cash under the mattress” approach by directing a high allocation to “safe” assets, such as cash, money market funds and government bonds.
Consider the following chart, which shows flows into money market funds versus equity funds during and after each presidential election year from 1992 through 2023. Notice that a majority of assets are invested in conservative money market funds during presidential years, while equity funds dominate inflows during the year following an election.
If you’re too conservatively invested, you could miss out on significant growth opportunities. At a minimum, it’s likely your portfolio won’t be able to keep up with inflation, which means your purchasing power would diminish over time.
Tip – Establish and maintain a diversified portfolio allocation in line with your long-term objectives, risk tolerance and investment goals. Your investment strategy should be informed by your overall financial plan and designed to weather a wide range of market conditions.
To achieve adequate diversification, consider combining stocks with bonds, large company stocks with small company stocks, U.S. stocks with international stocks, and investments from different sectors, such as technology, finance, energy, healthcare, etc.
If you could use help establishing a diversified investment portfolio to weather political uncertainty and help achieve your long-term goals, we’d love to have a conversation. Schedule a call with a member of our team.
