What Does the 2020 Election Mean for Your Portfolio?
The 2020 election cycle is in full swing. It’s primary season, which means the general election is right around the corner. Before you know it, the two major parties will have their conventions and we’ll be heading to the ballot box.
Of course, you may already have election fatigue. From the local level all the way up to national races, candidates are already flooding television with political ads.
As is the case in most presidential elections, candidates are also talking about the economy. They may make claims about what will happen in the economy if they’re elected or that the markets might decline if their opponent is elected.
That kind of rhetoric is common during elections, but is it accurate? Will the outcome of the election impact your portfolio? Should you worry about the election? Or perhaps even change your allocation to protect yourself.
Below are a few tips to keep in mind through the rest of the election year:
Keep history in perspective.
Focus on the long-term.
Your investment strategy was likely designed for the long-term. Perhaps you’re saving for retirement or some other goal that is years or possibly even decades in the future. Over that period, you’ll likely see times of market volatility.
Whether it’s an election year or not, it’s always helpful to focus on the long-term during challenging periods. Market downturns happen, but they are always temporary.
There are two common types of downturns: corrections and bear markets. Corrections are losses of 10% or more. Bear markets are losses of 20% or more. As you can see in the chart below, the average correction loses around 13% and the average bear market sees a loss of around 30%.2
However, the duration of each is also important. A correction, on average, lasts around four months. After that period, there is an average four-month recovery period to recoup the losses. Bear markets last longer. They have an average duration of 13 months with a 22-month recovery period.2
| Type of Correction | Average Loss | Avg. Duration | Avg. Recovery Duration |
|---|---|---|---|
| Correction | -13% | 4 months | 4 months |
| Bear Market | -30% | 13.2 months | 22 months |
Market downturns are never pleasant, but they are temporary. Keep an eye on the long-term and stick to your strategy.
Don’t make gut decisions.
It can be easy to make a gut, impulse decision when you hear and see stressful news on a regular basis. It might be tempting to sell your investments and move to asset classes that have less risk and volatility.
However, a move to perceived safety could do more harm than good. The chart below shows how the average equity investor has fared compared the S&P 500 over different periods of time. As you can see, the index always wins, sometimes by a wide margin. 3
| Time Period | Average Equity Investor | S&P 500 |
|---|---|---|
| 30-year | 3.98% | 10.16% |
| 20-year | 4.79% | 7.68% |
| 10-year | 3.64% | 6.95% |
| 5-year | 9.83% | 14.66% |
| 3-year | 3.42% | 8.87% |
Why does this happen? Primarily because the index stays invested at all times, while the average investor is constantly moving in and out of the market based on gut decisions or attempts to avoid loss. While investors may miss some declines with this strategy, they also miss out on gains. Staying invested usually leads to better long-term performance.
Ready to protect your portfolio this election year? Let’s talk about it. Contact us at Retirement Advisers.Net. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
1https://www.thebalance.com/presidential-elections-and-stock-market-returns-2388526
2https://www.cnbc.com/2018/12/24/whats-a-bear-market-and-how-long-do-they-usually-last-.html] 3https://www.marketwatch.com/story/americans-are-still-terrible-at-investing-annual-study-once-again-shows-2017-10-19
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