The first presidential debate is behind us, and election season is in full swing. It is important to note that this is the earliest our nation has ever held a presidential debate. Having the debate early serves to extend election season and perhaps amplify our opinions and feelings leading up to November.
As a politically divided nation with so much at stake, we can expect a lot of noise from the media. Strong opinions and heated debate can leave us in a heightened emotional state that can absolutely impair our ability to make sound financial decisions. I am sharing all this because it is important for us to be aware of this reality before it infects us. This is the proper way to prepare ourselves to make rational decisions, regardless of how we feel. I have found that one of the best ways to combat strong emotions (like fear), is with a clear knowledge of the truth. So, let’s look at some historical market data surrounding election outcomes.
Market Performance & Election Outcomes
It may be surprising to learn that historically the stock market has performed well in election years, regardless of which party took power. In fact, there have been 23 election years since the S&P 500 Index began, and 19 of these years (i.e. 83%) provided positive performance. When a Democrat was in office and a new Democrat was elected, the total return for that election year averaged 11.0%. When a Democrat was in office and a Republican was elected, the total return for the year averaged 12.9%.1
Party-Based Investing
A word of caution: Many of us have passionate political opinions that tempt us to invest (or divest) our portfolios based on which party wins the election. While voting with our dollars in this manner may feel good, history shows it can be a costly endeavor akin to drinking poison and expecting the other person to die. But don’t take my word for it, let’s look at the data.
Bespoke Investment Group found that if you began in 1953 with a $1,000 investment, and this money was only invested when a Republican was President, this approach resulted in an ending value of $27,400. Being invested when only a Democrat was President did better, resulting in an ending value of $61,800. But the best return went to the investor who remained invested, irrespective of election outcomes. That investor ended up with $1,690,000.2 Deciding to stay in the market ended up being a $1.6 million decision! “Timing the market” is never the answer… the correct answer is “Time IN the market.”
Greatest Financial Risk in Election Season
Historically speaking, the greatest financial risk investors face in an election year is their individual reaction. How we respond to the vitriol possibility that our desired party is not going to be in power can significantly influence our investment performance and directly impact our retirement security.
We may face an internal battle between our strong political feelings and the desire to make rational financial decisions. While investing based on which party is in power may seem wise, history has proven it a very costly endeavor.
If the election noise has you concerned, give me a call and let’s talk it through. My goal is to ensure your financial decisions are rational and in line with your stated objectives and goals.
– Dan
1. Data Source: Morningstar/Ibbotson Associates. The figures shown are past results and not predictive of results in future periods. 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. All indices are unmanaged and may not be invested in directly.
2. Bespoke Investment Group, Carson Investment Research, FactSet. Time period 1953-April 2024. 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. All indices are unmanaged and may not be invested in directly.
©2024 The Behavioral Finance Network
