Don't Make Drastic Change of Your Investment Because of Election
Recently, someone told me that he sold all of his investments and now held 100% in cash because he was worried about the outcome of the Presidential election.
While there's no doubt that the Presidential election has added a great deal of uncertainty to the stock markets (as we all know, uncertainty increases stock market volatility), and while it is also true that a new president (whoever it is)'s political agenda and economic policies will have an important impact on the economy, it's not a prudent move for any investors to make drastic changes to their investments driven by either the anxiety or actual outcome of the Presidential Election.
In a recent market commentary, the mutual fund giant Vanguard, showed their analysis of stock market performance that went back to 1853, which showed that "the returns of the stock market under Democratic and Republican administrations are virtually indistinguishable." Their finding is echoed by another analysis from Fidelity, which studied the stock market returns since 1960s and concluded that "The Democratic and Republican average annual returns were both close to 12%."
Why is there not a significant differences between party control and overall stock market performance? First, there's no doubt that a political party in control of either the White House or the U.S. Congress or both, can exercise a great deal of impact on our economy through its policies and new regulations. For example, biotech and pharmaceutical companies' stock prices have been down this year as both the U.S. Congress as well presidential campaigns raised questions about drug pricing. So is it wise for investors to bail out of all of their investments in those industries? If you are a long term investor, the answer is probably "No" because biotech and pharmaceutical industries are growth industries. With an aging population, the demand for their products will only increase. How much politicians can curtail rising drug prices is a big question mark.
Second, there are many factors that contributes to the stock market performances, such as the Federal Reserve's interest rate policy, the unemployment rate, corporate earnings, geopolitical events and even natural disasters. Many of these factors are beyond any political party's control.
It's also important to remember the stock market is always forward looking and by the time an average investor recognizes a trend, the stock market has already priced in the change. For example, since both presidential candidates have advocated massive investment in repairing U.S. infrastructure, many exchange traded funds that track performances of infrastructure, related companies have doubled the performance of the benchmark S&P 500 this year. Anyone trying to jump into these investment now will end up investing at the peak.
So what should average investors do at this point? Let's heed the advice from Vanguard--“It’s understandable that investors might have concerns because of the different policy positions of the candidates and the strongly held views of voters of all political persuasions. But investors should invest for the long term and not subject themselves to the political whims of the moment.”
So don't make any drastic change of your investments because of the Presidential election.