This year’s election has many investors on edge, and they’re wondering what they should do.
But elections typically don’t have as much of an impact on the market and on the economy as many investors expect.
The market historian and Wharton Professor Jeremy Siegel studied this in his classic book, Stocks for the Long Run, and found that:
“The market almost always declines in reaction to sudden, unexpected changes related to the presidency… sell-offs such as these provide good opportunities for investors to step up and buy stocks because the market usually reverses itself quickly following the change in leadership.”
Recent data shows that the election rally often starts even before the election.
This isn’t to say that you should sell stocks in anticipation of an election-related sell-off that may never happen.
The best course of action is to simply stick with your plan. That’s the hard, but essential, lesson we’ve learned in our decades of fund investing. It’s not easy to do, but it’s what must be done if we hope to get ahead. Selling based on fear and trying to properly time the market is almost always impossible.
If we could predict the future, we could make ourselves very wealthy overnight by betting on something we knew was a certainty. But we don’t know the future so we have to find a way to make our money grow over time with the understanding that it won’t be perfect, and there will be times when we have to hold our noses. In hindsight, those times we had to hold our noses are often the best times to invest. Conversely, the least successful times to invest are often when it looks like the coast is clear.
3 ways to avoid election year mistakes
1. Avoid making extreme changes to your portfolio
Trying to time the market is a mistake. Market timing doesn’t have a strong record of success. We’ve found that timing the market is less successful over the long run than simply sticking with your investment approach. Financial analyst and editor Mark Hulbert studied hundreds of market timing strategies, and concluded that the best approach was to stay invested. As wrote in Barron’s earlier this year:
“To bet that this time is different and that the right course of action is to go to cash or any other alternative asset class, such as bonds or gold, you have to bet that you will succeed when almost all professional market timers in the past have failed. That’s a triumph of hope over experience.”
But if you feel you absolutely need to do something, make a small change to your investments. Avoid making extreme moves. If you feel like you need to sell, sell just a small part of your portfolio.
If you’re over 70 and haven’t taken your IRA’s required minimum distribution, you could take that now as a way to take a little of your portfolio off the table. Selling means you could miss out on gains, and that if the market continues to move higher, you won’t fully participate. But if it helps you avoid selling out entirely, then it’s a move worth making—but make sure you have a plan for how and when you’ll get fully invested again.
2. Focus on the most likely outcome, not the worst case scenario
If you’re focusing on the worst case scenario rather than the most likely outcome, you may be making another mistake. This is an example of probability neglect, a powerful cognitive bias that causes us to concentrate on the worst possible outcome rather than the most likely one. It makes us feel like we are wisely preparing ourselves for potential dangers, but focusing on our biggest fears can really warp our perspective. It can make us see the stock market as a way to lose wealth rather than a way to build wealth.
And it can make us see elections as more powerful than they really are. Regardless of who wins the election in November, it’s unlikely that a new administration will destroy the U.S. economy or completely devalue the dollar. The more likely outcome is the election will have a minor impact on the market.
“Less than one-quarter [of major market movements] can be associated with a news event of major political or economic import,” Jeremy Siegel wrote in Stocks for the Long Run. In other words, what matters in the market often isn’t what you’re hearing on the news.
3. Keep a long-term focus
You are probably invested today in order to reach a goal that is many years away. You’ve taken the time to think through an allocation to stock and bond funds to help you navigate up and down markets. And you’ve chosen a strategy to help you respond to changing markets and stay on track in an ever-changing world.
So instead of getting wrapped up in what you don’t know, focus on what you know now—that you need to grow your portfolio in order to fund a comfortable retirement, and that stocks remain the best option for growth and bonds can steady the ride. A strategy like NoLoad FundX’s Upgrading approach can help you know where to invest now and what to do when markets change.
Here’s the takeaway – Uncertainty is part of investing, just as it’s part of life, and if you want to get ahead, you can’t let it hold you back.
A version of this article by FundX President Janet Brown appeared on Yahoo! Finance.