Investing During an Election Year: What You Should Know

Investing during an election year can seem particularly challenging amid the looming uncertainty. As campaigns ramp up, promises of policy reform and speculation about their likelihood can have varying impacts on financial markets, leaving many investors questioning the best approach. Let’s explore the historical relationship between elections and markets and its potential implications for your portfolio in the coming year.

 

Photo by GR Stocks on Unsplash

 

Elections and Investments: What History Shows

Despite our best intentions, humans make mistakes when investing. We often allow emotions to influence our decisions, and it’s hard to find a more emotionally charged topic than politics. However, history shows us that neither an election occurring nor the party elected has had a material impact on market returns in election years.

Here are some key observations:

  1. Market Returns: The S&P 500’s average return during election years is about the same as non-election years, but it is positive more often. Election years saw the S&P 500 generate positive returns more frequently than non-election years. Specifically, 83% of election years (20 out of 24) saw positive S&P 500 returns, higher than the 69% (49 out of 71) for non-election years.

  2. Recessions Matter More: Recessions matter much more to financial markets than political parties. While it appears that election years with Republican winners saw markets advance more, this gap in returns can be almost entirely explained by recessions. After removing election years where recessions occurred, average S&P 500 returns were much more similar for Democrats and Republicans.

Staying the Course

Great investors try to identify which variables influence markets and which do not, then act upon the former. Here are some practical tips for investing during an election year:

  1. Research and Educate: Understand the policies proposed by different parties and their potential impact on the economy. Knowledge is your best defense against emotional decision-making.

  2. Diversification: Diversify your portfolio across asset classes. A well-balanced mix can help mitigate risks associated with political uncertainty.

  3. Long-Term Perspective: Remember that elections are short-term events. Stay focused on your long-term investment goals and avoid knee-jerk reactions based on election outcomes.

In summary, while election years may feel uncertain, staying diversified and maintaining a long-term perspective can help you navigate the political noise. As the saying goes, “Time in the market beats timing the market.”

 

  This article is not advice and has not been prepared in accordance with legal requirements designed to promote the independence of investment research – no recommendations are given in the buying, selling or holding of any investments. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.