Does the Election Affect Your Investments? What You Need to Know About Market Trends

Election Day is right around the corner, and people are buzzing with excitement and worry. For some, it’s a time of hope, while for others, it brings concern about what’s next. Many investors wonder: Will this election impact my investments? Today, we're diving into that topic and discussing whether Election Day really matters to your financial future.

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A Look Back at Past Elections and the Stock Market

To understand how elections might affect your investments, let's take a quick trip down memory lane. Back in 1996, Americans were choosing between Bill Clinton, Bob Dole, and Ross Perot. On Election Day that year, the S&P 500 closed at 714 points. Today, it's closer to 5,800—a whopping 700% increase! And that doesn't even count any returns you’d get from dividends.

This historical data reminds us of something important: Over time, the stock market has grown, no matter who was in office. Sure, there have been ups and downs along the way, but the long-term trend has always been upward.

Data compiled by Commonwealth Financial Services. Past performance does not predict future results.  This is not representative of a client experience.

Is This Election Different? Probably Not.

The phrase “This time is different” is often a red flag. It’s common to feel like each election is the most crucial one, but history shows that the market tends to follow its usual patterns.

Investing is about patience and sticking to a plan. Companies generally keep growing, and the economy continues to expand. For long-term investors, the results of one election don’t usually change the big picture. The advice is to avoid making big investment moves based on short-term events.

America is More Than Its Politics

It’s easy to get caught up in the drama of election season, especially when news channels are full of heated debates and breaking news. But America is not just about politics. It’s about innovation, progress, and resilience.

In 1996, the internet was just getting started. Most people didn’t even have cell phones! Yet, look at how far we've come today. This shows how American innovation continues to drive economic growth, no matter what happens in Washington, D.C. This resilience is why we remain optimistic, even during times of political uncertainty.

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What History Teaches Us About Election Cycles and the Market

Let's examine some past elections to see how they impacted the stock market:

• 2008: The election between Barack Obama and John McCain happened right in the middle of a global financial crisis. When Obama won, the market initially dipped because of concerns about new regulations. But soon, it bounced back and kept rising in the following months.
• 2016: Donald Trump's unexpected victory over Hillary Clinton sent shockwaves through the stock market. Many thought his win would lead to a market downturn, and there was a temporary drop. But investors soon focused on his promises of tax cuts and deregulation, leading to a market rally.
• 2020: The election between Joe Biden and Donald Trump was filled with uncertainty due to the COVID-19 pandemic. Yet, even with all the challenges, the market continued to rise over the next few years.

The lesson? While elections might cause short-term fluctuations in the stock market, they rarely alter its long-term direction. Once the election is over and policies become clearer, the market typically stabilizes.

Don’t Interrupt Compounding

Charlie Munger was the business partner of Warren Buffet.  Together they are two of the most successful investors of all time. Charlie’s advice: The first rule of compounding - don’t interrupt compounding unnecessarily.  This means sticking to a long-term investment plan, even when things seem uncertain.

It’s natural to want to react when things around us feel chaotic, but often, doing nothing can be the best choice. If you’ve built a solid investment plan, following it calmly—rather than making rash decisions—is usually the key to success.

Staying Focused During Election Season

Election season can be stressful for investors. There’s always a temptation to react to what you see in the news.  Here are a few words of wisdom for staying on track:

1. Turn Off the News: The media loves to hype up elections, especially when it comes to predicting the stock market's reaction. The truth is, these predictions often don’t pan out. Turning off the TV can help you keep a clearer head.
2. Stick to Your Goals: It’s essential to remember your long-term financial goals. Investing isn’t about quick wins; it’s about building wealth over time. A single election is unlikely to change your entire investment plan.
3. Avoid Emotional Decisions: During election cycles, the stock market might experience more ups and downs than usual. Don’t let emotions drive your decisions. Stay calm and wait for the dust to settle.

Practical Tips for Investors During Election Time

Here are some practical tips for handling your investments during an election:

• Don’t Make Sudden Changes: Try not to make drastic portfolio changes just because of an election outcome. Short-term reactions can be deceiving.
• Stay Informed, Not Overwhelmed: It’s okay to stay informed about what’s happening, but avoid getting overwhelmed. Take news reports with a grain of salt.
• Keep a Long-Term View: Remember that investing is a marathon, not a sprint. Focus on what your investments will look like five, ten, or even twenty years from now.

Why Patience is Key

Patience is one of the most important qualities for any investor. There will always be elections, crises, and unexpected events. If you make changes to your investments based on every headline, you might end up hurting your portfolio more than helping it.

It’s normal for the stock market to have short-term ups and downs, especially around Election Day. However, if you stay patient and don’t panic, history suggests your investments can weather the storm.

Final Thoughts

As Election Day approaches, remember that the stock market has survived and thrived through many elections. It's natural to feel anxious, but history shows that patience and a focus on long-term goals are the keys to successful investing.

 Stay calm, stay focused, and don’t let the noise of election season derail your long-term plans!