What is the relationship between politics and your portfolio? This year, investors have lived through not one, but two political earthquakes. In June, pundits and markets were shocked (temporarily at least) by Great Britain’s vote to leave the European Union, referred to as “Brexit.” More recently here at home, in what many would describe as an even bigger shocker, Donald Trump was elected the 45th U.S. president.
In both cases, markets briefly dropped and swiftly bounced back. In the U.S. election, the fall came in overnight trading, with Dow futures falling almost 900 points as state-by-state results came in across the country. By the next day, however, those losses were quickly erased and flipped to solid gains.
Such political and financial tremors can pack an emotional jolt. Yet, they also present a great opportunity for us to focus on some important investing lessons and reminders.
For starters – easy to say but intensely challenging to live out – ignore the media pundits, financial and otherwise, who are almost always wrong, but never pay the price. As Daniel Goldie and Gordon Murray point out in their classic succinct book The Investment Answer, news outlets such as CNBC, Bloomberg or Fox Business pushing “market panic” themes “try to turn investing into entertainment.”
Another, perhaps surprising, lesson is that presidential elections do not impact the markets in the long term. Studies by Dimensional Fund Advisors (DFA), a highly-academic, research-oriented firm, indicate data going back to 1926 suggests no “obvious pattern of stock market performance based upon which party holds the Oval Office.” They conclude that investment decisions should not be made based on the outcome of presidential elections. DFA sums it up like this: “Over the long run, the market has provided substantial returns regardless of who controlled the executive branch.” Click here to read the DFA article on presidential elections and the stock market.
Politics and Your Portfolio
“Over the long run, the market has provided substantial returns regardless of who controlled the executive branch.” ~ Dimensional Fund Advisors
Now is a good time to review the keys to a better investment experience. Start with a plan that includes smart diversification. A globally-diversified portfolio, based on one’s long-term financial security needs and risk tolerance, reduces undue risk.
Avoid market timing and emotion-based, reactive investing. Stay the course and let markets work for you. Time in the markets, not market timing, rewards investors.