No matter where you fall on the political spectrum, you
probably agree that Nov. 3 can't get here fast enough.
If you're feeling antsy about the election outcome, you may
be tempted to go into defensive mode to protect your portfolio. But making
investment decisions based on politics usually isn't a sound strategy. Here are
four investing mistakes to avoid during election season.
1. Cashing out of the stock market
Presidential races make Wall Street nervous, so investors
often cash out as Election Day approaches. Historically, inflows to money
market funds -- which invest in extremely low-risk short-term debt -- have
risen threefold during election years, compared to non-election years. But the
only thing that's predictable about downturns is that they're going to happen.
We just don't know when.
Sure, the outcome of the election could cause the stock
market to dip in the short term, especially if the results are disputed. But
historically, the stock market has rewarded those who stay invested in a
diversified portfolio over the long term.
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Meanwhile, money market funds deliver returns on par with
interest from a CD or high-yield savings account. With today's record low
interest rates, that's not enough to keep pace with inflation.
2. Waiting until after the election to invest.
Trying to time the market for any reason, including an
election, is rarely a winning game plan. If you're waiting until after the
election to invest, here's why you should reconsider.
Consider three possible scenarios. In one, you invest at the
beginning of an election year. In the second, you make monthly investments for
10 months leading up to Election Day. And in the third, you wait until after
the election to invest.
Investing in a lump sum after the election would have
produced the worst returns in 16 of the past 22 elections over a four-year
holding period, according to a study from Capital Group that looked at this
hypothetical situation.
The takeaway is clear: Whether you're a lump-sum investor or
you practice dollar-cost averaging, you'll come out ahead if you don't try to
time your investments around politics. The best strategy is to ignore the
election altogether when it comes to investing decisions.
3. Focusing on short-term volatility
Stock market volatility tends to be high in November and
December immediately following an election. The best thing you can do is ignore
it.
The CBOE VIX Futures Index uses futures contract pricing to
measure how much volatility investors predict. Trading prices for futures
contracts expiring Oct. 28 peak at $31.90, then drop slightly for the next two
weeks, then peak again for those expiring Nov. 18 before tapering off --
implying that traders expect the most volatility shortly before and after the
election.
But short-term volatility has very little impact on
long-term results, so avoid the urge to sell just because the market gets
bumpy.
4. Changing your strategy based on your election
predictions.
The election will influence our lives in plenty of ways, but
who becomes president probably won't have a big effect on our stock portfolios.
Regardless of whether a Republican or a Democrat is president, stock market
returns tend to be below average for the first two years of their term and
above average for the last two, according to a Fidelity analysis of stock
market returns going back to the first presidential election in 1789.
Many analysts agree that the biggest risk to Wall Street
isn't who wins -- it's not having a clear winner. Even then, the effect on the
stock market would probably be short-lived.
If there's another stock market crash, it's far more likely
that it would be less the product of the election and more the result of
broader economic events, like another wave of coronavirus-related shutdowns or
widespread defaults following prolonged financial pain.
The election shouldn't affect your overall strategy. Don't
let the potential for short-term chaos distract you from your long-term goals.
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