In just over two weeks, Americans will head back to the polls to decide, among other things, who will lead our country for the next four years. Rest assured this won’t be a political article attempting to sway you toward any candidate. We’ve all been inundated with political rhetoric, and personally I find it exhausting.
Instead, I want to share a story about a former client who, ahead of 2020 election, decided to sell his investments to avoid election uncertainty. His goal was to avoid a volatile (read scary) time for his portfolio, then buy back in later “when the smoke cleared.” Against our advice, he assumed the markets would accommodate his thinking.
Poor plans can sound smart, especially while trying to convince yourself. But this client’s approach was flawed for a few simple reasons: First, history says markets are essentially indifferent to the political party of the sitting president. Second, try as he might to cloak his decision in sound logic, it still boiled down to an essential error: He was trying to time the market.
Looking back at data over the past half-century, it’s easy to see a common trend: Financial markets are politically agnostic. Since Kennedy was elected in 1961, only two presidents saw a negative market return from the day they took office to the day they left: Nixon (minus 19.8%) and Bush Jr. (minus 36.7%) During that same period, the three presidents with the highest market returns were Clinton (plus 209.8%), Obama (plus 181.1%), and Reagan (plus 117.9%). Taken at face value, this strong evidence shows there is no correlation between political party in office and market performance.
A chart (courtesy of YCharts) asks, “What if someone was only invested during periods when their preferred party ran the White House?” Assuming a hypothetical investment of $10,000 in the S&P 500 and a starting point of Jan. 3, 1950, a Democratic investor would see an account balance of a little more than $405,000 on March 28, 2024. A Republican investor for the same period would see a balance of just under $78,000. Had they simply remained invested through both parties’ leadership, their balance would be just over $3.15 million. If you have any thoughts of making an investment change due to politics, re-reading this paragraph might be valuable.
If history is trying to teach us anything, it’s that timing the market based on elections is foolish. But that doesn’t seem to stop people from trying. The problem is that doing this requires two more choices: first, when to sell everything, and second, when to buy it all back.
If you’re not already recognizing the lunacy of this approach, consider the first choice: When will you sell? Election outcomes are typically announced late in the evening, well after market close. That’s assuming the outcome is decided on election night without the need for recounts. If your assumption is that the market will drop based on the other guy or gal getting elected, you’ll have to sell ahead of the actual announcement. But what if your team wins?
Then the second choice: When do you buy back in? Is it a day, a week … a month later? When the “dust settles,” whatever that means? Most people don’t actually think this through when making knee-jerk reactions based on emotions.
Timing the market is always a poor decision for one simple reason: No one knows what will happen tomorrow, let alone how the market will react to it. Assuming you can predict that movement is foolish and shortsighted. You’re not investing; you’re gambling.
Our former client left the market with the S&P 500 sitting at 3,443. Today, it’s right around 5,750. Do the math; that’s a 67% higher value. They sat in cash, earning next to zero return on their investment. That “danger” they hoped to avoid? Their emotions drove them straight into it. Ouch!
One cannot escape turmoil nor minimize frightening events. Yet many people, for many years, have fled the investment markets at the most inopportune times. Human nature is wired to run from danger, even if it’s only a perceived threat. Your challenge as an investor is to remain focused on the plan, regardless of what your emotions may be telling you.
Our job as advisers is to help clients address problems with effective solutions, be a sounding board, and point out when their emotions may be getting the best of them. If a client ignores that perspective, there’s very little we can do to help. We can provide all the data, evidence and proof, but if you let emotion override wisdom and common sense, poor outcomes are all but guaranteed. Remember: Self-inflicted injuries are not covered by workman’s comp.
When thinking about the power of investing over long periods of time, and to paraphrase the late Charlie Munger, “The first rule of compounding: Never interrupt it unnecessarily.” As we approach yet another election, don’t let politics override your investment plan. Instead grab some popcorn and a few of those tiny American flags, and take a deep breath as the results roll in. Your future self will thank you for it.
Steve Booren is the founder of Prosperion Financial Advisors in Greenwood Village. He is the author of “Blind Spots: The Mental Mistakes Investors Make” and “Intelligent Investing: Your Guide to a Growing Retirement Income.” He was named by Forbes as a 2021 Best-in-State Wealth Advisor, and a Barron’s 2021 Top Advisor by State. This column is not intended to provide specific investment advice or recommendations.
