Improving Investor Behavior: Keep politics out of your portfolio

With the election just 45 days away, the information stream is unrelenting. Political news coverage, TV ads, postcards, phone calls, etc., make for an all-out assault designed to convince you for whom to vote. Regardless of where you stand, it’s essential to recognize the effect that this election might have on your portfolio.

This election will likely not have a substantial impact on the market, and there is historical evidence to support this viewpoint. Over time, the stock market has does well under both Democrats and Republicans. According to Investopedia, the average return on the S&P 500 from 1926 through 2019 is about 10% per year.

This is easy to forget with the bombardment of polarizing news. We’re led to believe that if the election results in the other candidate taking office, taxes could increase, the market could crash, etc. The simple fact is that a market crash based solely on who wins the election is highly unlikely. So instead, let’s focus on what we know to be true.

Short-term volatility should not cause long-term mistakes

On and around Election Day, we can expect increased market volatility. People may react or panic. They may let their emotions get the best of them, and they will make decisions that will drive the market up and down. The goal is not to be one of them. Understand that though volatility will increase in the short-term, things will level out and ultimately continue higher over the long-term. We need only to look back in history to see this same lesson. The night Donald Trump was elected, overnight futures dipped by more than 4%. By market close the next day, stocks had rallied. A month later, they were reaching all-time highs.

Those who stay invested do better than those who try to time the market

If you could have invested $10,000 in the “market” in 1896 (ETFs and other collective “market” funds didn’t exist back then, so this is purely a thought exercise) and never touched it, today you’d have more than $7 million. But what if you had only invested during the years your preferred party was in the White House? Your total return drops to less than $1 million. This same logic applies to people hoping to take advantage of the increased volatility around the election. While we’re fans of investing in companies when they are down in price, trying to “time the markets” is a fool’s errand. In my more than 40 years as a financial advisor, I’ve never met anyone able to do this with any level of consistency. Time in the market always beats timing the market.

The world will continue on

It’s important to note that markets don’t care if you like the president. According to data by Invesco, “Some of the best returns in the market came when the presidential approval rating was in the low range of 36% and 50%.” And while today’s rhetoric is at a fevered pitch, do not let emotion or fear drive your decisions.

The things that matter won’t change

Purchasing a share is like buying a part of the business. Companies make products and services, earn a profit, reinvest a portion of those profits, and distribute a percentage of profits to their owners, the shareholders. That mindset is entirely different than renting a stock by purchasing it at X, hope it goes up by Y, selling it at Z, and spending the profit. Instead, focus on consistent cash flow. Dividends are real cash payments, typically resulting in consistent, growing cash flow. In this scenario, inflation is the only real concern, and this tends to be affected more by monetary policy than who occupies the White House or Congress.

The flood of bad news will bury the good

What would it look like if presidential candidates had to produce an ad in support of the other? What if our leaders took the time to listen, inspire, encourage, and generally try to unite folks in pursuit of a common good? For nearly a year before an election, bad news seems to dominate the good. I wish my noise-canceling headphones worked on negative stories. It would allow me to hear better the progress private companies are making in engineering, design, innovation, and even space travel. Today, doctors and scientists have gone from recognizing the early signs of a completely new virus to developing a test for it. All this while working to create a vaccine in record time! The rhetoric may be negative, but the reality is far from it.

Part of improving investor behavior is guarding your mind. Your attention is your property. Don’t let it be taken from you with bad news. It can distract and distort your thinking. Most importantly, it can cause bad investor behavior.

America is far from perfect, but we’re still pretty darn good. I have never been more optimistic about our future. Good investor behavior includes keeping politics out of your portfolio.

Steve Booren is the founder of Prosperion Financial Advisors in Greenwood Village. He is the author of “Intelligent Investing: Your Guide to a Growing Retirement Income,” published in March 2019.

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