Every four years or so, investors begin hanging on every word the presidential nominees have to say about the economy and their plans to create change, and quite often you’re either going to agree with their economic plans or you are convinced the world will come to an end.
At the end of the day, who the President of the United States is has little to do with the performance of your portfolio. No one knows what the short-term impact will be after electing a new president, much less the president’s long-term effect on the fundamentals of the companies you invest in. Despite the volatility prior to the election, it is very probable that 18 months from now our markets and economy will be back to status quo.
Despite that, we still get the question, “What actions should I take today to save my portfolio from the impending doom?” Yes, that is a bit dramatic; therefore, not panicking would be the number one suggestion. The presidential election is a bit like the Super Bowl indicator—there is no direct correlation on how the market will respond to an elected administration. Normally the long-term average growth for the S&P 500 is around 10.5%. Rarely will the markets hit that mark in any given year, but long-term, the market has a tendency to go up. Surprisingly, in an election year, the average return is more than 12%. It would seem the volatility and craziness that comes during an election year is actually a positive for the markets since the 1960s.
You need to understand your emotional reaction to the politics. If you are following an investment philosophy such as the Ten Year Rule, who the president is shouldn’t matter. Your financial plan is based on your needs and situation—not whether the market is going up or down or if a Democrat or Republican is in office. Money you need within the next 10 years should be in fixed-income investments, held to maturity, to protect the principal. Any money you do not need within the next 10 years should be invested in the stock market for growth. The Ten Year Rule covers not only two business cycles, but two and a half presidential administration cycles. Ideally, you establish your plan based on your spending needs, you implement that plan and then maintain and stay the course through the election cycles. A volatile market is an inappropriate time to turn your portfolio inside out.
That said, based on historical averages, there is a good chance we will see a bear market—a drop of at least 20%—during the next administration cycle. Our current bull market has lasted since March 2009. Most economists will tell you it is long overdue; therefore, it cannot really be blamed on who is elected president. Economic recoveries are generally hindered by the Federal Reserve when they increase interest rates. While a rate hike keeps inflation in check, they can also thwart growth.
If you are expecting a slowdown or recession you may want to consider looking at defensive sectors, such as, consumer staples or utilities. Nevertheless, these sectors have their own risks. Even defensive positions are not necessarily immune from overall market movements. If you feel you want to make changes in your portfolio, take them in gradual steps, spreading your risk over time. However, we do not recommend moving money from stocks to fixed investments because of politics. Those decisions should be based on your financial plan and your liquidity needs. By following a Ten Year Rule, you should be able to sleep better at night knowing your money for the next 10 years is accounted for.
Past performance is no guarantee of future returns; however, the stock market’s long-term direction has historically been up even when you include recessions. If you have questions regarding your portfolio and how it fits in your overall financial plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.