Rarely (if ever) do finances and political opinions mix well. But what about a situation such as we find ourselves today, less than two weeks from a highly contentious election? Can we ignore the impact of politics on investment decision-making? The purpose of this post, dear reader, is to help put this election in perspective when it comes to investing. The five key points below will help you to understand the effects (or perhaps lack thereof) that election outcomes can have on long-term investment results.

#1 – You Cannot Build an Investment Process on Political Outcomes

We are all acutely aware that most folks have very strong feelings regarding the current presidential election. Regardless of your preferred candidate, it can be quite tempting to view the election as positive or negative for the stock market depending on whether your candidate wins. For example, it would be enticing to assume that if your candidate does not win, the stock market is destined for a precipitous decline. Here, however, is the bottom line: Approximately one-half of voters have historically been unhappy with the results of a presidential election. Said slightly differently, roughly half of the electorate didn’t vote for the winner. Perhaps, upon seeing half of those results, you felt compelled to sell your investment portfolio and sit-out that president’s term in office. What would have happened?

For a video providing a deeper dive into this chart, click here.

As the graphic above shows, you were quite likely to miss out on extraordinary growth. Why is that? Because, regardless of who is president, billions of people wake up every morning, do work that contributes to economic growth, and that growth finds its way to the bottom line of the companies that a diversified investor owns in their portfolio.

Keeping the graphic above in mind, can you draw a pattern from it? I certainly cannot. The gains and losses during either party’s administration seem random. Given the wide range of factors that contribute to investment returns over four- and eight-year periods, this apparent randomness begins to make a bit of sense. Housing and energy booms and busts, market and sector bubbles, or hyperinflation became the dominant driver of market returns during several of the presidencies shown above. What will the leading investment narrative be over the next four years? I don’t know for certain, and neither does anyone else. Much like the global pandemic, hard to predict events happen, and they can change the course of markets for years.

#2 – The Stakes Are High (for You)

Investing is about far more than the ebbs and flows of the stock market or the return of the S&P 500. The reason we invest, the ‘why’ behind these crucial decisions, is to achieve very real goals for my clients and their families. We do not invest to express a political opinion; we invest to make their vision and aspirations for the future a reality. Selling at the wrong time or sitting on the sidelines while the world moves forward can have life-changing effects. For some, lost returns from political speculation can mean delayed retirement, less opportunities for their kids, and falling short of other deeply held goals. One of my roles as a financial planner is to align clients’ unique goals with their investment strategy. The stakes are high, and this is a serious pursuit.

This election season could result in increased stock market swings (or ‘volatility’ in investment jargon). And it might not. Either way, investors always need to be prepared for volatility, whether it comes from an election or the limitless other sources of market swings. Put simply, volatility is part of investing. How investors handle those swings, however, will have far more impact on the lives they lead in the future than the political events and headlines of any day, month, or year. The key for investors is to be honest with themselves about their own 1) comfort level with volatility, 2) ability to accept risk, and 3) need for investment returns to achieve their goals. These three factors – and not political events or who is in the Oval Office – should determine the right investment portfolio.

#3 – The President Is Not the Economy

Of course, every presidential election is a major milestone for the future of our country. Our next president will set an agenda in Washington D.C. that impacts every American. However, I would strongly contend that each president is given far too much credit or blame for the performance of the stock market during their tenure. Let's consider the multitude of factors, both foreseeable and unpredictable, that go into determining stock prices on a day-to-day and even minute-by-minute basis. There are, quite literally, hundreds of thousands of humans and trading algorithms buying and selling stocks during each millisecond the markets are open. Some of the factors that affect buying and selling decisions are interest rates, economic data, currency rates, earnings, and forecasts, just to name a few. While the president certainly has influence on the areas noted above, they do not directly control them.

#4 – My Clients Are Invested Around the Globe

As mentioned, whomever the winner of this election may be, a large percentage of our country will be unhappy with the result. And yet, there is a world of investment opportunity out there. 43% of the world stock market is located outside of the United States. Put a different way, the U.S. stock market accounts for just over one-half of investable public companies. Many of my clients take comfort in knowing that, regardless of who may be president in January, a portion of their portfolio is invested abroad, including Germany, Japan, England , Australia, India, South Korea, and more.

Of course, we know that these countries are impacted by U.S. policy as well. For example, according to the International Monetary Fund, 62% of the world’s currency reserves are held in U.S. Dollars. That is a remarkable amount of money. If the next president invokes policy that appreciates or depreciates the dollar, this will affect all economies around the globe. Recognizing this fact, however, it is important to remember that there are currently 195 sovereign nations according to the U.S. State Department. None of these countries share the exact same regulatory, business, governance, demographic, and economic environments. By investing globally, a portfolio is not subject to the political whims of any one country.

Furthermore, investment performance across countries varies widely, in part due to the different environments discussed above. Over the last 20 years how many times do you think the U.S. stock market has been the best performer in the world? The answer: once. To illustrate, the chart below provides the top ten performing stock markets by country each year from 2000 to 2019. For clients that are investing over the long-term, concentrating only in the U.S. rarely makes sense.

#5 – Don’t Take My Word for It; See for Yourself

If you’re similar to me, you don’t like simply accepting what you read online at face value. Rather, I prefer to ‘geek-out’ on the data myself. The link below will take you to an interactive website with unemployment, market return, inflation, gross domestic product (GDP), federal surplus/deficit, and congressional leadership for each president dating back to 1929, beginning with Herbert Hoover. The data is incredibly fascinating and tells the story far better than I ever could.

How Much Impact Does the President Have on Stocks

Conclusion

As we can see, politics and investing don’t mix well. After all, your investments are about your future, not a political candidate or party. Most of us hold our political views as an important part of who we are and what we believe. For me, this is why the process of casting a ballot is so near and dear to my own heart.

The core of any investment approach, however, should be about you, your goals, and your ability to weather the inevitable ups and downs of markets. As a result, investing during any period – much less in the midst of an election cycle and pandemic – is driven by your personal and unique needs. If you’d like to discuss your specific situation in greater detail, please reach out to me by phone, email, or text.

ViviFi Planning is a Bend, OR-based fee-only, fiduciary financial planning firm serving young professional families in Central Oregon and across the country. The author of this post, Andy Mardock, is a Certified Financial Planner® professional. He serves on the regional board of NAPFA and brings more than 10 years of personal financial planning experience to advising clients. To learn more, visit https://www.vivifiplan.com/about-us.

Past performance is not a guarantee of future returns.

5 Key Points to Put the Election and Investing in Perspective