In the second week of our Managing Election Hysteria Edu-Blog we are going to talk about how the markets and election seasons effect each other. Many people wonder if politics really drive the market, or if it is the other way around? Election years are already high-stress, but when we see market volatility during election season we often assume that whatever happens on the election front is the cause of what the market does. It's easy to make emotional choices when we see this happening which could lead to costly investing mistakes.
Here are what I consider the top three.
Top 3 Investing Mistakes During Election Season
1. We place too much weight on the outcome of the election.
This is a mistake because history has shown that U.S. elections have little to no impact on long-term investments. Presidents seem to get too much credit and blame for the health of the markets and the economy. While markets can get jittery in the short-term it's important to remember that emotional decisions can be detrimental so the most important thing we can do, regardless of the political climate, is stay invested.
2. We get scared by primary season volatility.
The markets hate uncertainty and presidential primaries give them plenty to dislike. As investors it is critical for us to remember that primary volatility is very short-lived. History shows that as soon as the primary is done, markets typically return to their normal upward hike. Again, the lesson here is to stay invested and avoid emotional decisions. I bet you're sensing a theme.
3. We try to time the market around political activity.
Everyone has at least one thing in common right now. Anxiety over the markets in 2020 and the fact that it's an election year adds to that anxiety. However, we have to remember that all the country's issues are on display during an election cycle as candidates focus on what they are going to do better than each other. Markets really don't like that. So, investors tend to err on the side of caution during election years and put more money into conservative investments which pulls money out of the markets and can contribute to volatility too.
So how do we avoid making emotional and potentially irrational decisions? Stay calm, stay invested, and embrace short-term volatility.
Stay tuned for next week's segment on the how markets may predict the next president.