A lot of attention is placed on the stock market as a measure of general economic approval of those in charge. The stock market itself isn’t a particularly reliable measure of how well the economy is doing for regular folks. However, it’s still of great interest to many people when it comes to trying to figure out how elections will impact your stock portfolio.
So, how much do elections really hit your stock portfolio? The real answer is this: Not as much as you might think.
Stocks are Likely to Rise Over Time, No Matter Who’s President
First of all, if you look at historical data, stock prices in general rise over time. So, if you remain consistent with your stock portfolio, even in difficult times, you’re more likely to see success in the long run.
However, in general, there have been bigger stock market gains under Democratic presidents than under Republican presidents. Even though that’s the case, the difference isn’t really that big. Again, over time your portfolio is likely to see success — no matter who’s sitting in the White House.
Another consideration is that, in many cases, stock market performance is also impacted by whether the incumbent party wins. Again, the difference is fairly small, but there’s a slight edge in stock market performance when the incumbent party retains the presidency.
When you look at the analysis, though, it’s pretty clear that the market continues to rise over time. This is regardless of who wins elections, including those who are “in charge” of Congress.
So, if you’re panicking because the president or party you’re partial to might not win any given election, the reality is that you’re likely to see gains in your portfolio over time, especially if you use an indexing strategy that focuses on a wide swath of the market.
Expect Short-Term Volatility in Your Stock Portfolio
One thing to be aware of is that elections can result in short-term volatility. The markets don’t like uncertainty. So, when things are up in the air, you can expect to see big swings in the market. Additionally, it’s worth noting that markets aren’t particularly friendly whenever there is a government sweep.
According to a U.S. bank analysis, when either party sweeps an election — winning the Senate, House and White House — short-term volatility can be expected.
This short-term volatility makes many investors nervous. However, it’s important to get beyond those nerves if you expect to save your stock portfolio.
How to Invest During an Election Cycle
It seems counterintuitive, but the best thing to do during an election cycle is to stay the course. Do you have an investing plan? Stick to it.
For many investors who rely heavily on the funds in their retirement accounts, there’s not much to change. Over time, indexers tend to come out ahead, so elections aren’t likely to have a huge impact on your stock portfolio, or how you should behave.
If you have individual stocks, however, you might need to consider your strategy. While the stock market as a whole might continue to gain regardless of the situation, individual stocks and sectors can be impacted. Different policies championed by various leaders and parties can make a difference. So, you might consider how an election might impact individual holdings in sectors like:
You might need to tweak your stock portoflio, depending on the situation and how you feel your indiviudal equities will fare under a new administration or Congressional makeup.
If you’re especially concerned about a stock market drop and recession, you can consider using a bucket strategy to keep some cash on hand for usage during the short-term volatility. This might be important if you’re already retired and you rely on your stock portfolio for income. You don’t want to have to liquidate during a down market.
Finally, some investors find themselves taking advantage of short-term volatility by deploying extra cash. It’s important to avoid trying to time the market in this case, though.
In the end, your stock portfolio is likely to be fine, no matter who wins the next election. Indeed, the stock market as a whole has yet to log a historical loss in any 25-year period. If you’re in it for the long haul, it’s likely that you’ll be just fine, especially if you index. And, if this no longer becomes the case, there’s a chance that we’re facing bigger problems than the stock market and money.
Carefully review your stock portfolio to see if there are tweaks you need to make in the runup to an election. For most people, though, there likely won’t need to be big changes to investing strategy.