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Five Tips For Successfully Investing In The Stock Market During An Election Cycle

Expert Panel
POST WRITTEN BY
Elle Kaplan
This article is more than 7 years old.

Does the president affect the stock market?

On either side of the aisle, candidates would certainly like for you to think so. Democrats and Republicans alike would love to be seen as the winning candidate with the acumen and knowledge to change the stock market for the better. And during this polarizing election, you most likely have an opinion on how the other side is going to spoil the economy.

Well, there’s a wealth of research on this subject, and the answer may surprise you.

According to CNN, since 1945, the average annual stock market gain under a Democratic president is 9.7 percent. Under a Republican president, it's only been 6.7 percent.

Before you start cheering (or getting out your proverbial pitchfork), consider that the highest period of stock market returns was under Republican President Gerald Ford, where the market soared 18.6 percent per year on average – greater than the returns under recent Democrats. Following that rally, Democratic President Jimmy Carter was met with a fairly disappointing 6 percent average return on the markets.

In a country with checks and balances, it’s also worth examining how Congress has a play in the stock market through presidents. The same study also found that a Republican-controlled Congress with a Republican president had the best returns, although that was closely followed by a Democratic president facing a Republican Congress.

To answer the question: it’s unclear if the next president is going to bring the stock market down or send it soaring (or anything in between). So as the actual election looms closer, it might be tempting to adjust your investment plans to account for or react to this uncertainty.

Before you make a decision, here are some more points to consider:

Avoid market timing.

Have you ever heard of the phrase “buy high, sell low?" I didn’t think so. Often, when we try to time the markets (exit/enter strategically) we do exactly that. In fact, Morningstar found that investors lose 2.5 percent of their returns every year on average thanks to this.

It might seem tempting to exit the stock market and “wait ‘till this all blows over,” especially if your hated candidate gets elected. However, studies like Morningstar ’s show that you’ll most likely end up buying when the market is rising, or selling when it’s dropping. It’s almost impossible to time the markets correctly.

Look at the data and keep your eyes on the prize.

No, I don’t mean the polling data (although it is interesting). By data, I mean the stock market data. The election (or anything else) may very much coincide with a drop in the stock market, even a rather large one.

If that occurs, keep this in mind: Since 1926, it has taken an average of 3.3 years for stocks to reach a new high after a bear market, according to The Wall Street Journal. That’s shorter than the time the president will even be in office!

By looking towards your future objectives that are quite further down the line, like retirement, you can maintain a cool head and the right perspective for your goals. Quite simply, if you have an investment aimed for years down the line, your best option may be to stay put and weather the storm.

Remember, we aren’t in a vacuum.

As much as the president would like to believe he or she affects everything in the world, they aren’t in a vacuum. For instance, 40 percent of the revenue generated by S&P 500 companies comes from overseas. Moreover, time and again, we see global economic events like the Chinese market slowdown causing ripples in the U.S. stock market. Everything from global currency prices to foreign oil affects the stock market, not just the president.

Diversify globally.

With that global impact in mind, it’s worth noting that almost half of the world’s stock market capitalization is outside the U.S. There are times like these that highlight how diversifying globally can be beneficial for any investors.

Despite global effects on the U.S. market, global investors get to enjoy the benefits of occasional opposite performance on a larger scale. For instance, international markets may be up while U.S. markets may be down and vice versa. In times of increased volatility, this can allow you to better weather the ups and downs in order to successfully invest your wealth for the long-term.

Adjust for your risk tolerance.

Presidential election notwithstanding, your portfolio should reflect your appetite for risk. Unfortunately, the presidential election isn’t the only event that will cause anxiety about the stock market. As we’ve seen time and again, everything from world politics to natural events can cause market turmoil and nervousness.

Although the best stock market returns may come by sticking to a long-term plan, that all depends on your actual ability to stick to that plan. Your portfolio should also be something that brings comfort to your financial future, not something that keeps you up every night.

Rather than making a rash decision or selling out of your investments, adjust your portfolio to small degrees to comfortably ride out any uncertainty. Speak with your financial advisor or allocate an even greater portion of your portfolio into low-volatility assets (like bonds). I’ve found that even a 5 percent adjustment in a portfolio allocation is enough to comfort risk-adverse individuals.

The next president will certainly have an effect on the economy, whether it’s just through their election or through the policies they enact. While it would be nice (especially for political experts) to neatly tie the election to the stock market, that simply won’t happen.

The truth is that the stock market is always volatile, no matter who is in the lead — Democrat, Republican, Independent or otherwise. We just happen to notice it when the market is down or when the election is coming up. Through smart investing and a long-term perspective, you’ll win either way in the election.