As the election in November approaches, many are wondering how it will impact their IRAs and 401ks. Some prospective investors don’t want to act until they know who is going to take office. I have heard so many people say, “Shouldn’t I wait to make a decision until after the election is over?.” It’s a valid question because the market typically does not like uncertainty. In addition, political policies can and do have an impact on businesses in the United States and this can flow through to the underlying shareholders.
However, investors should not allow the upcoming election to determine their investment decisions. While it’s natural to be concerned about how political changes might affect the market, allowing election results to dictate your investment choices is risky. Here are three reasons why you should build a financial plan and maintain a disciplined investment approach, regardless of the political landscape.
Presidential elections have been known to cause volatility and uncertainty in the market. In the run-up to an election, market fluctuations can be driven by speculation and voter hopes. However, this volatility is usually short-lived. In addition, contrary to popular belief, historically election years have been profitable years to be invested in the market. Out of the past 24 election cycles going back nearly 100 years, 20 out of 24 of those election years were positive returns for the S&P 500 Index. Of the four election years which had negative returns, two of them were largely the result of the dot-com bubble bursting in 2000 and the ‘08 financial crisis. As you can see, historical evidence alone does not support sitting out of the market until an election is over.
Investment strategies should be based on long-term goals rather than short-term political events. Whether you’re saving for retirement, a child’s education, or other future needs, your investment plan should be specifically designed to accomplish those goals. If your plan is set up correctly, you won’t need to worry about the kind of short-term volatility that an election might cause. Basing your investment decisions on an election is just another way of trying to time the market. For the vast majority of investors, time in the market is the key to success, not timing the market. In other words, invest now and give your money time to grow. Don’t wait around for the perfect entry point.
Regardless of the election outcome, major policy shifts take time. New administrations may promise changes, but the process of actually executing new policies is often slow. This means that the immediate impact of an election on specific sectors or investments is typically less pronounced than expected. Yes, there will often be short-term uncertainty and volatility, but lasting change takes time. Long-term investment strategies should account for gradual policy changes rather than trying to take advantage of immediate electoral results.
Diversification and correctly managing risk is more important than your own personal opinions about the market. When you sit down to design your financial plan, you should use diversification and your current life situation to align your investments with your own personal risk tolerance. A well-diversified portfolio is designed to mitigate risk and withstand various market conditions, including political uncertainty. Rather than shifting investments based on election outcomes, focus on maintaining a diversified portfolio and sticking to a plan. Not every investor will be able to stomach the same kind of volatility. But every investor can construct a personalized plan they are able to stick to even in the face of an election.
Political events often trigger strong emotions and biases, leading to fear-driven decisions rather than rational analysis. This behavior is known as emotional investing, and it can cloud judgment and result in investment choices that lack a solid financial foundation. By adhering to a well-considered investment plan and avoiding decisions based on temporary political events, you can reduce the negative impact of biased, emotional investing.
Conclusion
While the outcome of the 2024 presidential election may influence market sentiment in the short term, don’t let it dictate your investment strategy. A disciplined approach focused on long-term goals, diversification, and, if needed, professional advice will serve you better than making reactive decisions based on political events. Some people like to guess what the future holds or invest based on their feelings; others use the uncertain future as the primary reason to put off investment planning until “things settle down.” Neither of those options are optimal. Instead, stay committed to your investment plan and avoid the pitfalls of short-term thinking. You’ll find you’re better positioned to achieve your financial objectives, regardless of the political climate.
Tyler Kert, a licensed financial advisor and CPA, provides financial planning and tax consulting services at Tamarack Wealth Management in Cashmere, WA.
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