The world's events always affect the markets and making smart investment choices requires you to look at what's happening around the world. But what about during an election year? How should you invest while the country is deciding which direction to take? Regardless of which side of the political spectrum you prefer, you may want to keep the following facts in mind as you invest during an election year.
- Stocks Historically Trend Upward Regardless of Who's in Office
Although stock values go up and down day-to-day and month-to-month, the stock market has a historically upward trend, regardless of who's in office. A historical average return from the S&P 500 is in excess of 8% per year1. To put these numbers into perspective politically, seven Republicans and seven Democrats have called the White House home since the infamous market crash of the Great Depression. In other words, the person in the Oval Office typically doesn't affect overall stock market growth.
- Markets Tend to Bounce Back After a Volatile Primary Season
During the primary season, stock values tend to be volatile, which can be scary for investors. But you shouldn't necessarily yield to the fear and sell. During the year after a primary season, stocks return an average of 10.1%2. Although you can never predict returns, the patterns indicate that if you stay the course during a volatile primary season, values are likely to return.
- Investors Often Cash Out Assets During Election Years
Research indicates that the amount of net assets flowing into money market accounts triples during election years. Essentially, this trend indicates that many investors get nervous, sell stocks, and put the cash into money market accounts. Look no further than March 2020 where many investors cashed out longer-term stock related investments, missing a historic rebound in equity values. Staying in the markets while others jump ship may position you for greater rewards down the road.
- “Time-in-the-Market”…Not Timing the Market Matters the Most
A well-timed investment may be profitable, but in most cases, the time you give your investments is more important than the timing. In other words, staying the course may benefit you more in the long run than selling or buying at what appears to be the right time. The data shows that pulling out during an election year simply does not make sense because stocks have had positive returns for 17 of the last 19 election years3. The only two years with negative returns 2000 and 2008 were largely attributed to the bursting of tech and housing bubbles respectively, rather than election cycles.
- A Thoughtful Financial Plan Can Help You Stay Disciplined
Have clear goals for each “bucket” of invested money can help remind you of how much “Time-in-the-Market” your investment needs. For retirement savings, you may need 30 years of “Time-in-the-Market”. For an imminent home down payment you should probably ZERO time in the stock market and consider a more conservative strategy. A sound financial plan helps give definition and rules to your various investments.
When you need extra guidance or have questions about investing during an election year or at any other time, consult your financial planner. A financial planner can help you make investment decisions that make sense both in light of your personal goals and in terms of what's happening in the world. They can also share historical data and trends with you so that you can confidently make investment decisions during times of political uncertainty such as election years.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
Past performance is no guarantee of future results.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Sources:
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