Author: Brent Lemieux CFA® CPA
There has been quite a bit of “the sky is falling” talk due to the upcoming election. With the two least popular candidates in the last ten election cycles remaining, warnings of disaster seem to be flowing in from everywhere. If you are scared at the proposition of one candidate, or both, sitting in the White House next January you might wonder what changes you should make to your portfolio.
Our advice: Do nothing. Stay the course.
It’s important to remember that what you really own when you have mutual funds or ETFs in your portfolio. You own a basket of businesses. These businesses can anticipate and adapt to changes in the political environment. In fact, they’re remarkably good at this. We have a tendency to overestimate both the positive and negative effects certain events will have on businesses. Many pundits predicted dark days for the market when President Obama was reelected in November of 2012. However, in 2013 the S&P 500 increased by over 30% — one of the top 10 years since World War II. Was this because of President Obama? Probably not. It’s just that what goes on in the market has a lot less to do with who is in the White House than the media would have us believe.
If you sold all of your equities following the second Obama election, your portfolio would have been much worse off. I don’t mean to insinuate that 2017 will be a great year for the market regardless of who gets elected. I am only suggesting that if we try to time the market based on factors like elections, our portfolios will likely pay the price. Timing the market well is a task that is nearly impossible for most average and sophisticated investors alike.
However, you may have the feeling that the political climate has gotten much worse and this time is different. Below I’ve compiled a list of events that global markets have endured and rebounded from. History is no guarantee of future performance, but it is important to put things in perspective.
- Russia and Ukraine conflict
- Global financial crisis
- Conflict after conflict in the Middle East
- Internet bubble
- Asian currency crisis
- The Cold War
- High oil prices
- Low oil prices
- Savings and loan crisis
- Vietnam War
- Korean War
- 2 World Wars
- The Great Depression
- Countless international conflicts
- Dozens of bear markets
- US Civil War
- And many more…
Of course the loss of human life and destruction from many of these events is deeply saddening. And many of these events resulted in bad markets, but a recovery has always followed. In fact, many industries and businesses have emerged from crises stronger than ever before.
Is it possible that the next president could enact legislation that is sub-optimal, or even harmful? Yes.
Does it matter for your long term investment portfolio? Probably not.
This is not to say that we shouldn’t be upset by a candidate we believe is unfit for the job being elected. Of course a President can have a real positive or negative impact on certain groups of people. We can protest the new President’s actions, try to rally support for congressmen and women who will oppose them, and so on. However, I would argue that it would be unwise to make serious changes to your portfolio based on the election. It is likely that the most extreme actions a President tries to take will be blocked by congress or will be reversed in the next President’s term. Things may look bleak for a while, but it’s important to remember the age old adage: This too shall pass.
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