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Politics and Investing

Sigma Investment Counselors

August 13, 2020

Recently, I had four client meetings on the same day.  While four client meetings on the same day isn’t unusual, what was unusual was the main topic of all of the meetings.  The first two clients were incredibly anxious about Joe Biden winning the Presidency and their stock portfolio crashing.  The third and fourth meetings, were both clients who were incredibly anxious that Donald Trump was going to be re-elected and their stock portfolio would crash.  I joked with my colleagues that I am tempted to host a meeting with all four clients and allow them to debate each other.

It is impossible to predict what the market will do in the next 12 months, regardless of who wins the White House.  In each of those meetings, we reviewed their short-term cash needs for 2020 and 2021.  We talked about how low risk bonds and short-term investments will help fund those cash needs, even through a potentially volatile market.  We talked about the long-term nature of their equity investments.  We discussed their investment goals, objectives, overall risk levels, and whether any of those had changed.  While it is common for some objectives and risk levels to change in different situations, all four clients agreed to maintain their allocation to equities for the long run.

Most of our clients’ primary concern is to maintain their standard of living throughout the rest of their lives.  We have developed financial plans and investment portfolios that look past short-term gyrations of the market, invest for the long run, and balance each client’s return objectives with their unique risk tolerance. Our goal is to build diversified portfolios that minimize all types of risk, including political.  Once we review portfolios and plans, most clients feel a sense of comfort that we are as prepared as possible for any changing winds, be it politics or something else.

Historically, trying to time the market to invest under Democratic or Republican presidents has not worked.  A recent report from the Schwab Center for Financial Research showed investing only under a Republican or Democratic White House from 1961-2019, was no match to staying invested throughout that time.  $10,000 invested in 1961 grew to over $3,200,000 by 2019.  Only investing under Republicans, that same $10,000 grew to approximately $86,000.  Only investing under Democrats that same $10,000 grew to approximately $376,000.  The same report also showed that election year average returns have not been different from non-election years, and there is no consistent influence on sector returns.

Stock prices are reflections on the crowd’s estimations about the future, and it is understandable that any type of change or increased uncertainty make markets nervous.  If you do a quick web search, you can find many pundits predicting why a Biden presidency would be better for the economy and market than a Trump presidency, and vice versa.   A Democratic sweep would probably mean a rollback of some of Trump’s tax cuts, most likely a negative for the market.  However, increased stimulus spending and possible trade stability, could be potential positives.

We also need to remember U.S. politics are not the only factor affecting stock prices.  Things like monetary policy, consumer confidence, and global trends matter, too.  Investors should take comfort that in the long run, a buy and hold strategy of a diversified portfolio of stocks, bonds, and cash has weathered political change in the U.S. for decades and should continue to do the same in the future.

All comments and suggestions are welcome.

Marisa A. Bradbury, CFA, CFP®

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