On this episode of The Impatient Investor, Andrew discusses election anxiety and how it has historically caused increased market volatility during election years. Andrew explains why this volatility occurs, and how to avoid it through smart investing. Enjoy!
“While everyone else rearranges the deck chairs in the face of sociopolitical uncertainty, reallocating from one volatile asset to another, financially independent investors, sit back and relax unfazed by the anxiety plaguing investors in the public markets.”
The latest polls show Biden in the lead. Will the results of the upcoming presidential election impact your investment allocation? Apparently for many investors, the answer is yes. A survey released by UBS found that 46% of respondents consisting of investors and business owners ranked the upcoming election among the biggest worries with 46% of Americans saying they would adjust their portfolios based on the winner.
Election anxiety has historically led to increased volatility in the markets in the runup to presidential elections. This year is no exception as UBS noted in a statement that a closely contested US election could indeed result in increased market volatility. Long-term studies show that the average stock market returns over a four-year presidential term are agnostic when it comes to the president’s party affiliation. A recent Fidelity study found that the average stock market returns for the full four-year term following Republican or Democrat win were nearly identical. With an 8.4% versus an 8.2% average return following Republican and democratic wins respectively. This study analyzed stock performance going back to 1789. If the average annual stock market returns are irrelevant, no matter who’s in office, what explains the increased volatility leading up to an election? The simplest explanation is human behavior.
Immediately following Donald Trump’s victory in 2016, the DOW immediately dropped 800 points overnight, but recovered by the closing bell the following day, up 257 points. Did Trump do anything to impact underlying economic metrics within 24 hours? Of course not. He wasn’t even an office yet. It was pure investor speculation and sentiment that contributed to the market volatility. This is true in every election cycle, no matter who wins. Elections are an indictment on stock market stability, whereas economic fundamentals like corporate earnings, interest rates and economic row should be the bedrock of stock market valuation. More often than not It’s outside factors like elections, that affect price more than anything else.
So, here’s the question. Should the presidential election affect your investment allocation? It shouldn’t. Unfortunately for investors heavily allocated in equities, they often have no choice, but to reallocate because their fortunes rise and fall with the rest of the investing crowd who collectively become more jittery and anxious around election time, resulting in extreme volatility. When we talk about financial independence, we’re often referring to the most common understanding of the term, which is having enough resources to live as you wish for the rest of your life, without having to worry about work. We should add to the end of that definition without having to worry about work or any outside factors, conditions, or circumstances. True financial independence means not having to worry about the impact of the next election, a global pandemic, greenhouse gases, or any other extraneous factor for that matter. The smart money like institutions, ultra-wealthy investors, and successful university endowments are adapted, insulating themselves from socioeconomic factors affecting their wealth. They free themselves from worry by allocating to the right assets.
While everyone else rearranges the deck chairs in the face of sociopolitical uncertainty, reallocating from one volatile asset to another, financially independent investors, sit back and relax unfazed by the anxiety plaguing investors in the public markets. They’re able to do this by avoiding the public markets in favor of private markets offering productive investments that cashflow and appreciate, investments like commercial real estate. True financial independence can only be achieved when your money is working for you while you sleep, no matter what’s going on in the world. Ultimately, it’s you who controls your investments and with post-election markets driven by emotions and fear, you can ultimately avoid this chaos by taking the emotions out of the equation. Follow the smart money by taking your assets out of the public markets. Take control of your investments and choose to invest in real assets with low volatility and no correlation to Wall Street. If you’re interested in learning more, go to www.stoptradinghours.com.