Sep 30, 2024
It’s almost Election Day in the U.S. once again. While the outcome may be uncertain, one thing we can count on is that plenty of opinions and predictions will be floated in the days surrounding the vote. In financial circles, this will inevitably include discussion of the potential impact on markets. But should elections influence long-term investment decisions?
We would caution investors against making changes to a long-term plan in a bid to profit or avoid losses from changes in the political winds. For context, it is helpful to think of markets as a powerful information-processing machine. The combined impact of millions of investors placing billions of dollars’ worth of trades each day results in market prices that incorporate the collective expectations of those investors. This makes consistently outguessing market prices very difficult.1
Furthermore, data for the stock market going back to 1926 shows that returns in months when presidential elections took place have not tended to be that different from returns in any other month.
The chart below shows the frequency of monthly returns (expressed in 1% increments) for a broad-market index of US stocks from January 1926–December 2023. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months in which returns were between 1% and 2%).
The blue and red horizontal lines represent months during which a presidential election was held, with red meaning a Republican won the White House and blue representing the same for Democrats. This graphic illustrates that election month returns have been well dispersed throughout the range of outcomes, with no clear pattern based on which party won the presidency.
Distribution of Monthly Returns for the S&P 500 Index, January 1926–December 2023
Past performance is not a guarantee of future results.
It’s natural for investors to look for a connection between who wins the White House and which way stocks will go. But shareholders are investing in companies, not a political party. And companies focus on serving their customers and helping their businesses grow, regardless of who is in the White House.
Stocks have rewarded disciplined investors over the long term, through Democratic and Republican presidencies. Making investment decisions based on the outcome of elections, or how investors think they might unfold, is unlikely to result in reliable excess returns. On the contrary, it may lead to costly mistakes. Accordingly, there is a strong case for investors to rely on a consistent approach to asset allocation—making a long-term plan and sticking to it.
Navigate Election Uncertainty with Experienced Guidance
While elections come and go, your financial future deserves a strategy that transcends political cycles. As the data shows, trying to time the market based on election outcomes is a risky proposition that even sophisticated investors struggle to execute successfully. Instead of reacting to political headlines, wouldn’t you rather have a comprehensive plan that works across all market conditions?
At Prosperity Capital Advisors, we understand the temptation to adjust your portfolio based on election predictions. That’s why our affiliated advisors take a different approach – creating personalized, long-term strategies that help you stay focused on your goals regardless of who occupies the White House. Through The Bucket Plan® process, we help clients develop dynamic wealth management plans that consider:
- Strategic asset allocation that aligns with your time horizon, not election cycles
- Tax-efficient investment strategies that work across different political environments
- Risk management approaches that protect against market volatility
- Income planning that provides consistency through changing administrations
Don’t let election uncertainty derail your financial future. Connect with a PCA affiliated advisor today to discover how The Bucket Plan® can help you build and preserve wealth through any political season.
Disclosure: Prosperity Capital Advisors prioritizes client interests with a planning-first approach, offering tailored strategies to navigate complex investment decisions. Our dedicated team helps clients avoid common pitfalls such as market timing and performance chasing, ensuring strategies meet individual goals and risk tolerance. See our full list of advisors by clicking here.
This blog was created and published by Dimensional Fund Advisors. Learn more about Dimensional Fund Advisors here. The original post was published on September 30, 2024 , and can be found here.