With the elections just around the corner, many of you may be wondering about your money and your investments. We’ll hope to quench your thirst (if any) for this connection of money with politics.
1. If you take action due to the elections, it’s market timing, no matter how you justify it. Market timing is known to be that activity of buying or selling because you think you know something is happening (or think you know) either good or bad. Elections, and a prediction of what may happen, either good or bad no matter how you see the results, is a form of market timing. You’re simply deciding to do something due to an outside factor and not your own financial plan. The issue here is that ‘market timing’ rarely works, and when it does, it’s due to pure luck – as it could have went the other way just as well. Another point many market timers miss is that they think they can ‘forecast’ better than what the market is actually telling. The current stock market has already priced in a potential tough and maybe even contested election. How do I know this? Because it’s known and public information, it is a probability this time around and the market (and the millions of participants that make it) have agreed that the current prices reflect ALL that is known. To aim to ‘market time’ is to think that you may know better than the collective wisdom & actions of the millions of market participants. The smartest people in this field know what they don’t know and leave such predictions to the weather people, which often are also very wrong.
2. Let’s say you’re actually good and can time it and get out before a potential market weakness, a big if, but go with me here. Would you know when to come back to the market? How long would you stay out? What would be the other trigger to go back in? Consider these and many more questions that may seem to have justifiable answers now, but become very hard as you get even more confident that you were right and wait for an even further decline. This is not just a hypothetical, millions of people that left the market in 2008-2009 never came back to the stock market for the following 3-4 years, after the market had recovered most of the losses. And they didn’t time it right either, sold at the bottom due to fear and then never came back – a double whammy.
3. What we do expect is probably increased volatility, which means big swings (either negative or positive) based on different perceptions of the participants and the computer overlords. Just an FYI, more than 80-90% of all the trades in the US are done by algorithmic trading, technically computers, that follow certain rules and formulas. A very small slice of the trading is actually people ‘voting’ with their money. This has also worsened the ups and downs and made volatile days even more volatile, and thus more emotional for most people. The issue with big volatility is that trying to miss the worst days you’ll also miss the best days, as we know and research proves that the worst days happen very closely to the best days – major swings up and down right next to each other. And the issue is that if you miss the best days, by trying to miss the worst days, it could have a major impact on your performance. Take a look at how missing just a few days out of many years affect your portfolio. Just a few days over the last 40 years, and the results are devastating.
4. Now let’s assume the market really drops from here. Let's say a really unforeseen election result, even worse than what’s already priced in. The data tells us that over long periods of time (5-10 years+) even after a major drop, markets recover and recover really healthy. Over the many market drops since 1928 up to the last major drop of 2009, the recovery has been as aggressive as the drop. 1 year later after the drop the returns on average were 47% positive, 5-years later the cumulative returns were 109% on average, and 10-years after the drop the cumulative returns were over 194%. The chart below will let you see in more detail, based on whichever market drop you’d like to investigate.
5. The Federal Reserve, interest rates & the business cycle are huge factors to the stock market, which shouldn’t be discounted even in an election year. The Federal Reserve has started huge Quantitative Easing operations and created over $3 Trillion of new money that is in circulation supporting different market initiatives since the start of the pandemic. They’ve also expressed that they would do almost anything to assure regular market operations, and panicking or major unexpected drops will probably be ‘fought’ in the background. The extremely low interest rates are also supporting the stock market, the mortgage and housing markets and other parts of the market where debt is used. The business cycle is another factor that doesn’t seem to be at the end of its cycle. Technology and new market initiatives, infrastructure building, healthcare initiatives etc. may give it new life, no matter who is elected. Also other factors such as the make up of Congress, who takes which house and who’s eventually President also matter, and no way to predict ahead what campaign initiatives will pass and what will just be on the back burner. Politicians of all colors also change their tone once elected and not all promised comes to see daylight.
6. Other factors matter even more. Here’s a chance for us to talk about what really matters – which is your:
a. Actual savings rate (what you save and invest periodically),
b. Your behavior, which is how you stick to your plan and don’t make rushed, market-forced decisions and
c. Just giving it enough ‘time in the market’. What really matters is how long you stay invested and let your money compound over time and for long-term goals, elections or any single event shouldn’t really matter. If you already have an established plan that has taken in consideration your goals, time horizon and your tolerance for risk, the best, but also the toughest thing to do is nothing.
And with that we’ll leave you with Napoleon Bonaparte’s words as he describes a military genius, but which is very valid also for investing: "The man who can do the average thing when everyone else around him is losing his mind.”
Lead Advisor, InvestEd.