Clients have started occasionally asking if changes should be made to their investment allocation in anticipation of the upcoming election this November.
The answer, generally, is no.
Three Reasons NOT to Change Your Long-term Plan Due to a Presidential Election:
Reason #1: We've already carefully established a plan, part of which was determining how much cash vs. bonds vs. stocks is appropriate for each individual or family's unique situation. The role of cash is liquidity, the role of bond is protection from stock market fluctuations, and the role of stock is long-term growth to beat inflation. Nothing about a presidential election will change those fundamental investment planning and retirement planning principles.
Reason #2: Regardless of which political party holds the presidency, the stock market has produced average annual returns that have far outpaced bonds, cash, and inflation (see table below). Selling stock generally means "buying" cash or bond, which are both fairly terrible long-term alternatives, especially in today's low interest rate environment with the 10-year US Treasury Bond currently yielding under 1%.
Reason #3: Even if you theoretically knew in advance which political party would win the presidency, this information would still not tell you with certainty what the stock market will do moving forward. The presidential election is one of many, many factors that can impact stock prices at a given time.
For example, a common fear is that higher taxes may hurt the stock market. True, higher taxes in a silo probably aren't a positive for stock prices, but what if a highly effective vaccine is announced around the same time as a tax increase? What if there's another massive government stimulus program at the same time as a tax increase? What else may be around the corner, either positive or negative, that has the potential to be very impactful that we don't see yet? Don't fall into the trap of thinking that the future is more predictable than it is.
There's always many factors at play, and there's no way to know in advance what the net effect of all these factors will be on future stock prices.
Establishing a sound plan, then sticking with your plan up to and throughout your retirement, protects your long-term financial security.
Stock vs. Bond vs. Inflation Under Different Presidents:
This is not political.
I initially organized the data below for internal use only, but I decided that sharing it might be helpful to reinforce this point: Regardless of what political party wins the presidency, US stock returns have historically beat inflation by a very considerable margin.
Data Summary Table*:
*Data from NYU Stern School of Business linked here: Data Set
The full data set is below.
I caution anyone from looking at this data and arriving at the conclusion that one political party winning the presidency is better for future stock returns versus another.
The start of the full data set below is the late 1920s. This coincided with the start of the S&P index. This is a very unfavorable starting point for Republican Presidents and very favorable starting point for Democrat Presidents. Rather than hand pick a starting year, which could favor one side versus the other, the entire history of the S&P index was used for objectivity.
Remember, there are many factors that impact stock prices at any given time. We don't want anticipation of the election or the outcome of the election to trigger short-term decisions that will impact your long-term planning.
The role of cash is liquidity, the role of bond is protection from stock market fluctuations, and the role of stock is long-term growth to beat inflation.
Nothing about this upcoming presidential election, or the next one, or the next one, or the next one, will change those fundamental investment planning and retirement planning principles.
Establishing a plan that determines an appropriate amount of stock, bond, and cash for your specific financial situation, then sticking with your plan over time, helps protect your long-term financial security.
If you'd like to discuss this 1-on-1, call or email me at any time.
Full Data Set*
*Data from NYU Stern School of Business linked here: Data Set
Want a 1-on-1 retirement planning session? Fill out the form on our website, call us at 267-427-5667, or email kyle.rolek@rolekretirement.com