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Today we’re diving into a topic that grabs investors’ attention every four years: the Presidential election.
The potential impact on the economy, policy, and markets often leads to increased anxiety and speculation. However, history shows that election outcomes have a minimal impact for long-term investors.
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Below are a series of charts from a variety of sources looking at performance relative to political regimes and election cycles.
Source: Dimensional Fund Advisors
Source: Dimensional Fund Advisors
Source: Dimensional Fund Advisors
Source: BlackRock
Source: BlackRock
Source: BlackRock
Source: BlackRock
Source: US Bank Asset Management Group
As you will quickly realize from the data in the charts, the historical facts are clear: the stock market has advanced regardless of which party is in the White House.
Let’s remember what is happening when you invest. When you invest, you are providing capital to companies who are trying to earn money regardless of what party controls the White House or Congress.
There will undoubtedly be short-term market movements leading up to and following the elections. And every election year, I see the uncertainty surrounding the elections cause investors to make decisions that are full of emotion and lacking in relevant data.
Unfortunately, there will be many investors who are even more susceptible to this behavior when the candidate they voted for doesn’t win.
This doesn’t have to be you.
If the elections have you feeling uncertain about your portfolio, take a step back and think about the reason you invest in the first place.
You are investing to grow your wealth at a rate greater than inflation without taking undue risk.
Bringing politics into your portfolio results in the type of market timing and security selection mistakes that is conclusively bad for your long-term returns. The risk of being wrong with these types of trades is undue risk.
Meanwhile, the uncertainty that you may be feeling now or may feel in the future because of the election or any other situation in the world is the cost of higher expected returns that stocks offer versus alternatives like cash or bonds.
Times like these are precisely when the importance of having a long-term financial plan in place is highlighted. When you have a long-term plan in place that considers the uncertainties around these sorts of events and incorporates periods of poor market returns, it eliminates the need to react to the latest news or headlines.
Elections are high-stakes events that capture national attention, and it’s easy to get caught up in the drama and uncertainty. However, as long-term investors, it’s crucial to look beyond the immediate noise.
The Long Term Investor audio is edited by the team at The Podcast Consultant
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