Why true investors don’t worry about their portfolios on Election Day
A recent study by asset management firm Janus Henderson indicated that half of those surveyed are “very concerned” about the 2024 U.S. presidential election. Only a third of those surveyed are highly worried about inflation, the possibility of a recession, or higher interest rates.
Insurance company Nationwide polled 2,404 investors and found, regardless of political affiliation, they believe the economy will be hurt if the party they are less affiliated with wins the White House. In fact, 32% think if their party loses, the country will plunge into a recession within a year.
These survey results are surprising to us. We are surprised the percentages are so low! We have been around long enough to have experienced several election cycles and the angst about who will win and what will happen has seemingly increased each time. The rise of cable news and social media surely haven’t helped.
We do not know who will win on November 5, 2024. We don’t even know for certain who the candidates will be. What we can say with confidence is the outcome should not dictate what you do with your investments. The world’s stock markets trend up and the longer the time frame, the more reliable the results. The time frame for most true investors is longer than a presidential term.
The time frame for most true investors is longer than a presidential term.
Nonetheless, we thought it would be interesting to see what would happen if one got in or out of the market based on who won the Presidency. Let’s pretend we correctly predict on November 1st who will win the election a few days later and invest accordingly. We will use the CRSP 1-10 index of the entire U.S. stock market and one-month Treasury bills as our cash proxy.
If we are die-hard Republicans who think a Democrat will ruin everything, we stay in cash when a Democrat heads to Pennsylvania Avenue and remain in cash until a Republican wins, at which point we go all-in on U. S. stocks until the next Democrat becomes President and so on.
If we are die-hard Democrats who think a Republican will ruin everything, we do the opposite. In other words, we get in the market when our party wins and out of the market when our party loses the election.
We looked at every election since 1928 and simulated getting in and out based on the election results over the following 28 years, an even seven terms to make it easier on us. Who do you think wins, market-timing Democrats or market-timing Republicans?
Market-timing Democrats did better in every one of these 17 periods and substantially so in many cases. Does this mean investors should be rooting for a victory by the Democratic party because they will make more money? No, it does not.
We used the term “market-timing Democrats” and “market-timing Republicans” deliberately. The best returns came from those that did NOT try to time the market no matter how enthusiastic they were about their party or how much they detested the other party. They simply held on.
The best returns came from those that did NOT try to time the market no matter how enthusiastic they were about their party or how much they detested the other party.
Of the 17 periods, the non-timers that stayed in the market (a.k.a. true long-term investors) did better than the market-timers in 15 of those periods, highlighted in green below. The only two failures came due to the massive market decline that kicked off the Great Depression and the other in one of the periods that included the 2000s, a decade in which there were two roughly 50% declines in the market. That most recent period’s Compound Annual Growth Rate (CAGR) lagged the market timer by a mere .45% per year. In addition, in only 3 of the 17 periods did the long-term investor experience a CAGR less than 10%. The market-timers fell short of a 10% CAGR in 14 of the 17 periods. The average result for the long -term investor was 11.00%. The market-timing Democrats average result was 9.40% and the market-timing Republican recorded an average of 5.63%.
These results make perfect sense. Markets have gone up during the service of most Presidents so being out has meant missing out on that growth. This is no accident.
When you own a broadly diversified array of stocks, you own a share of many companies. You invest in those companies, not political parties. Companies focus on serving their customers and growing their businesses, regardless of who is in the White House or which party controls the houses of Congress. The President certainly has influence on the economy and the businesses that operate in it, but there are hundreds of other factors which impact market returns.
It is the constant focus on being profitable that makes the track record of diversified stock holdings so compelling. The profit motive spurs adaptation and innovation and explains why markets have always recovered from downturns and trended up over time. It is why it is said that time in the market is the better approach than timing the market.
This is great news for true investors that are patient and disciplined. It means you don’t need to predict short term market events or read the tea leaves on the election, interest rates, tax rates or the myriad of other factors which may influence the markets.
It is also important to realize that many important personal financial decisions have little or nothing to do with the markets. The breadwinner of a young family who carries no life insurance or the retiree who takes a large sum out of their IRA to buy a sure thing rental property for “passive” income are making questionable decisions regardless of who is in any political office.
Whether you like the President or not, if you begin to let that feeling make you think you can predict the direction of the stock market in the short term, then you are setting yourself up for an inferior result. Moreover, as soon as you let your political views begin to inform your personal financial planning decisions, you become vulnerable to manipulation.
So many things are sold based on fear because fear-based selling works. This is true of financial products and true when selling the public on a candidate for office. The reason so many campaign ads are attack ads or otherwise negative is because they get a better result than touting the nice things about a candidate.
Your political fears may be warranted, but letting those fears turn a sound plan into a speculation about the near-term market behavior is a recipe for poor results. As soon as you notice someone trying to sell you a product or candidate based on these fears, the best thing you can do is maximize your level of skepticism. It is highly unlikely to be as bad as it is made out to be.
Success in personal finance hinges on focusing on what you can control and recognizing what you can’t. Diversification, discipline, and patience have an excellent track record that should be replicable – if we don’t work ourselves into a frenzy and inappropriately shrink our time frames. True investors have time frames longer than presidential terms. Invest, don’t speculate.
In the words of David Booth, founder of Dimensional funds, “Vote with your ballot. Not your life savings.”
Additional reading on the “News & Posts” page of www.moisandfizgerald.com
Moisand Fitzgerald Tamayo, LLC is an Orlando, Tampa and Melbourne, Florida based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between. If you have any questions or would like to discuss anything further, please give us a call or send us a note. If you are not a client and wish to receive emails notifying you of new posts – no more than once per month – fill out the subscription information in the sidebar to the right. For more frequent updates, follow us on Facebook, LinkedIn, or Twitter.
Important Additional Information & Disclosures
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Moisand Fitzgerald Tamayo, LLC-“MFT”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from MFT.
Please remember that if you are a MFT client, it remains your responsibility to advise MFT, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. MFT is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. Tax advice is given only to clients and only when agreed to by MFT. A copy of the MFT’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request.
Please Note: MFT does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to MFT’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Please Note: Limitations: While MFT does NOT pay for recognition, awards, or publicity, neither rankings and/or recognition by unaffiliated rating services, publications, or other organizations, nor the achievement of any designation or certification, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if MFT is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers. No ranking or recognition should be construed as a current or past endorsement of MFT by any of its clients. ANY QUESTIONS: MFT’s Chief Compliance Officer remains available to address any questions regarding rankings and/or recognitions, including providing the criteria used for any reflected ranking.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your MFT account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your MFT accounts; and, (3) a description of each comparative benchmark/index is available upon request.