We prefer not to let politics get in the way of good market decisions. However, at times like these, when so many readers seem convinced the election will tank the market, the juxtaposition of politics and investing is difficult to ignore, cautions Rich Moroney, editor of Dow Theory Forecasts.
With today’s polarizing environment in mind, here are three key points to remember before you let the political winds change the tack of your stock portfolio:
1) The stock market has historically done better with a Democrat in the Oval Office, though the data may be misleading. According to one study, annualized real market returns since 1952 under Democrats have been 10.6%, versus 4.8% for Republicans.
However, plenty of questions muddy that water — how did the market perform between Election Day and Inauguration Day, what affect did the composition of Congress have on the results, how much of the returns were driven by the actions of previous administrations, etc. So . . .
2) Anyone who tells you a Republican/Democratic victory will help/hurt stocks is either guessing or hoping. Neither of those motivations has a history of driving wise investment choices. Which means . . .
3) Regardless of who you want to win the election, who you believe will win the election, and who actually wins the election, adjusting your long-term asset allocation in advance of the election makes little sense.
Even if you guess right about the outcome of the election, you then need to guess right about the direction, duration, and magnitude of the market’s reaction. That’s a risky approach even if you guess the election right, And, of course, you could guess the election wrong.
In our view, if your current portfolio allocation makes sense based on your age, level of wealth, cash-flow needs, time horizon, and risk tolerance, don’t let the fact that the U.S. will be electing a president mess up a good thing.
We currently advise readers to hold 92% to 97% of equity portfolios in stocks. That equity target could change based on market developments, but don’t expect it to adjust based on political developments.
