As promised, this week, we will discuss the non-sensical ideas investors devise to attempt to time the market during election seasons and the media “spewage” that supports them.
Let’s start with this little gem of a thought: “The stock market only goes up when the ____________ party wins.”
This is pure nonsense because if you take a historical view of the markets, which all long-term investors do, you’ll see that since 1936, seven Democrats and seven Republicans have occupied the Oval Office during times of war, economic downturn, global and domestic issues, hyperinflation, oil crises, and the like, and yet the market has continued to rise.1
To illustrate my point, here is a quick example. If you invested $1,000 in the S&P 500 when FDR was president at the end of 2019, it would have been worth $14 Million.1 In other words, the market does well no matter who is in office.
OK, how about this one: “It’s best to get out of the market right before elections.”
More nonsense! While I won’t deny that things can get a little crazy during the height of election season or that the markets don’t like hostility, especially when it’s combined with uncertainty, getting out of the market is never the answer. In fact, a few years back, Capital Group/American Funds performed a study analyzing three different ways to handle investments in an election year across 22 election cycles beginning in 1932. They took their findings and measured the outcome after a short four-year hold period. The three strategies they tested were a) being fully invested, b) continually making contributions to a portfolio, c) and the enemy of investment success, sitting on the sidelines. Let’s take a look at what they discovered.
The portfolio that stayed fully invested beginning on January 1st of an election year had the best results in 14 of the 22 years and performed the worst of all three portfolios in only six election years.1 The second portfolio, where consistent contributions were made throughout the election cycle, had the best outcome in only 5 of the 22 years but never had the worst outcome in any year.1 And then there’s the portfolio that sat the whole thing out or sold and then waited until January 1st of the year following the election to invest.1 It performed best only 3 out of 22 times and the worst 16 times.1 Options one and two seem much better to me because it illustrates a long-term mindset and doesn’t allow present friction to deter it from staying invested and continuing to invest. And as I am fond of saying, the market will reward you over time for patience and consistency.
One more myth for this week - “The markets are always more volatile before an election.”
While that might seem true or even a little bit logical, a study by Vanguard shows us otherwise. In this study, Vanguard looked at the volatility of the S&P 500 from 1964 through 2019 and compared that with the 100-day period before and after a presidential election. Their findings show that the annualized volatility of the market during the 100-day period before and after a presidential election was extremely close to the volatility of the market on the whole. The annualized volatility of the S&P 500 from 1964 to 2019 was 15.7%, while the volatility for the 100-day period before and after a presidential election over the same time period was 13.8%.2 Which begs the question, volatility? What volatility? As you can see from the Vanguard study, markets are actually less volatile around elections.
That’s enough fun for one week! Join me next week when we will learn how the media causes us to believe some of the myths we busted today.
Until next time…
One last thought: I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
Sources:
1Capital_Group_2020_Election_...
2Elections Matter but not so Much to Your Investments
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.
All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.