Election years can be fraught with uncertainty as developments surrounding the candidates, their platforms, and their predicted effects on the economy and markets dominate the news. But should you let this stream of political information influence how you and I manage your investment portfolio?
A lengthy history of empirical research suggests not.
Elections matter, just not in all the ways you might think to an investor. Of course, they hold great importance in upholding the U.S. tradition of democratic, representative government. However, their impact on market returns has historically proved to be negligible, as shown in the chart below.
Comparing election years versus nonelection years: 60% stock/40% bond portfolio returns show no significant statistical difference
Given the horse-race nature of political campaigns, you may think that in the months closest to an election, there is a noticeable uptick in volatility. Think again. In actuality, the opposite has been true. From January 1, 1964, to March 21, 2021, the Standard & Poor’s 500 Index’s annualized volatility was 14.1% in the 100 days before a presidential election and 13.8% in the 100 days after a presidential election, both of which were lower than the 16.2% annualized volatility for the full time period.
Volatility and the vote: Markets tend to ignore elections
S&P 500 Index annualized volatility
Full time period: 16.2%
The bottom line: Elections are another one of those events that generate lots of headlines but that should not sway you from following the financial plan we created. It’s understandable to have concerns about the election. But as far as your portfolio and the markets are concerned, history suggests it will be a nonissue.
Part of successful investing is understanding what you can control, and letting your emotions take a back seat to the financial plan we put in place. By maintaining perspective, discipline, and a long-term outlook, you can sustain progress toward your financial goals, despite the short-run uncertainty that events such as elections can create.