At the start of 2020, many investors would have told you that the upcoming presidential election was likely to be biggest source of uncertainty this year. A few short months later, the COVID-19 pandemic and widespread social unrest changed our attention and created a new source of uncertainty. As we move closer November 3rd many investors attention has shifted back to the presidential election. There is no shortage of news sources sharing their views and generating high levels of emotion around what each candidate's election might mean. This article is not meant to pick a side or stir up the same emotions every other news source has aimed to do. Rather, it is to take the extreme emotions created by the upcoming election out of investment process and help give us guidance about how we should allocate our assets going forward.
1: Placing too much emphasis on who wins
Although you might want one candidate to win over the other for personal reasons, history has told us that over the long run your portfolio doesn't care that much. Capital Group's economist, Darrell Spence, is quoted saying “Presidents get far too much credit, and far too much blame, for the health of the U.S. economy and the state of the financial markets. There are many other variables that determine economic growth and market returns and, frankly, presidents have very little influence over them.” The graph below helps illustrate this point.
2: The "Let's get out, then wait and see what happens" mentality
This can often be the easy thing to say when the markets get volatile and uncertainty climbs. However, this mindset creates a number of the problems. The first of which is that an investor must be right twice to correctly execute this strategy. They must be right about the time to get out and then right again about the best time to get back in. Often getting out can be the easy part but getting back in can be difficult. Once an investor is out of the market there often never seems a good time to get back in. When the news is at it’s worst it certainly doesn’t feel like the time to invest; and when the things start to get better you feel you might have already missed the gains and it once again doesn’t feel like a great time to get back in. We have found that most investors tend to experience better portfolio performance over the long term when they stay invested. The graph below helps illustrate this point by showing the growth of $10,000 invested for the long term as compared to investing only while certain parties are in office.
3: Watching too much news
Although it is important to stay informed about current events, watching the constant news cycle can often lead investors believe that the world around them is far worse off than it might actually be. We live in a time where there is no shortage of news and opinions and often the most exaggerated and negative stories are the ones that make the headlines. A constant focus on these stories can make one believe that a change to their portfolio is necessary based on all the news they are hearing. However, we feel you should only change your investment strategy based on your timeline not the news headlines. Below is a graph that helps illustrate this point by showing the performance of a $10,000 investment at the start of the last 19 presidencies.
