October 20th 2024.
As Americans, we have an important decision to make in just a couple of weeks. The upcoming election will determine who will lead our country for the next four years. But don't worry, this is not another political article trying to sway your vote. I think we can all agree that we've had enough of the constant political rhetoric, and personally, I find it exhausting.
Instead, I want to share a story about a former client who made a big decision ahead of the 2020 election. He decided to sell all of his investments to avoid the uncertainty that often comes with an election year. His reasoning was that he wanted to protect his portfolio from any potential volatility, and he planned to buy back in later when things had settled down. Despite our advice, he was convinced that the markets would align with his thinking.
But unfortunately, his plan was flawed for a few simple reasons. First of all, history has shown that the markets are not affected by the political party of the sitting president. And second, no matter how much he tried to justify his decision, it ultimately came down to one crucial mistake: he was trying to time the market.
If we look back at the data from the past 50 years, we can clearly see that the financial markets are not influenced by political parties. In fact, out of the nine presidents who have served during this time, only two saw a negative market return from the day they took office to the day they left: Nixon and Bush Jr. On the other hand, the three presidents with the highest market returns were Clinton, Obama, and Reagan. This evidence clearly shows that there is no correlation between the political party in office and market performance.
In fact, a chart shows that even if someone only invested during periods when their preferred party was in the White House, they would still have a significantly lower balance compared to someone who remained invested through both parties' leadership. This further emphasizes the fact that trying to make investment decisions based on politics is not a wise choice.
If we take a step back and look at the bigger picture, it's clear that trying to time the market based on elections is a foolish idea. But for some reason, people continue to try. The problem is that this approach requires two crucial decisions: when to sell everything and when to buy it back. And let's be honest, no one can predict the future, so making these decisions based on emotions and assumptions is not a sound strategy.
Think about it, when will you sell? Election results are usually announced late in the evening, well after the markets have closed. And that's assuming the outcome is clear and there are no recounts. So if your assumption is that the market will drop based on the election results, you'll have to sell before the actual announcement. But what if your preferred candidate wins? Then there's the second decision of when to buy back in. Is it a day, a week, a month later? Most people don't think these things through when making impulsive decisions based on emotions.
The truth is, trying to time the market is never a good idea because no one can predict what will happen tomorrow, let alone how the market will react to it. It's essentially gambling, not investing. And unfortunately, our former client learned this the hard way. He pulled out of the market when the S&P 500 was at 3,443, and today it's at 5,750. That's a 67% increase. Meanwhile, he sat in cash, earning next to nothing on his investment. The very thing he was trying to avoid – volatility – was exactly what he ended up experiencing. Ouch.
It's important to remember that we can't escape turmoil or minimize frightening events. But for some reason, many people tend to flee from the investment markets at the most inopportune times. It's human nature to run from danger, even if it's just a perceived threat. But as an investor, it's crucial to stay focused on the plan, regardless of how our emotions may be trying to sway us.
As advisers, our job is to help our clients navigate problems and find effective solutions. We're here to be a sounding board and to point out when emotions may be clouding their judgement. But if a client chooses to ignore our perspective, there's not much we can do to help. We can provide all the data, evidence, and proof, but if emotions take over, poor outcomes are almost guaranteed. Remember, self-inflicted injuries are not covered by workman's comp.
As we approach yet another election, let's remember the power of investing over the long term. To quote the late Charlie Munger, "The first rule of compounding: Never interrupt it unnecessarily." So instead of letting politics override our investment plans, let's grab some popcorn and a few American flags and take a deep breath as the results roll in. Trust me, your future self will thank you for it.
Steve Booren is the founder of Prosperion Financial Advisors, and he's also the author of "Blind Spots: The Mental Mistakes Investors Make" and "Intelligent Investing: Your Guide to a Growing Retirement Income." He was recently recognized by Forbes as a 2021 Best-in-State Wealth Advisor and by Barron's as a 2021 Top Advisor by State. This column is not intended to provide specific investment advice or recommendations.
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