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Don’t Play Politics with Your Portfolio

Election Season is here. As a citizen, you may be keenly interested in what happens in November. But as an investor, should you be equally concerned?

It’s certainly true, of course, that elections have consequences, and that the people in power can pass laws that may have either a direct or indirect impact on financial assets and investment strategies. So, for example, changes in how certain investments are taxed could affect your choice of investment vehicles. Or, a major government program, such as a big investment in infrastructure, could boost the fortunes of specific industries – construction, transportation, energy, etc. – which, in turn, would make these industries more attractive investment targets, at least for a while.

After the fact, it’s not that hard to see how these types of political decisions affect various elements of investing – but it’s difficult to predict these developments. In the first place, many campaign promises go unfulfilled. And even those that enter the legislative process may exit it in a vastly different form, so that the ultimate effects are far different than what might have been intended.

Furthermore, you can’t really make any blanket predictions of how the financial markets will fare if one party or another captures the White House, as the president’s party has not been shown to have a statistically significant impact on U.S. stock market returns.1 And the markets have performed either more or less favorably under various configurations of party control of the White House and Congress (i.e. Democrat/Democrat, Democrat/Republican, Republican/Democrat and Republican/Republican).2

So, instead of trying to forecast what might or might not happen, depending on who wins the elections, think of ways you can improve your investment outlook, no matter what’s going on in Washington. Here are some suggestions to consider:

  • Make changes for the right reasons – While the results of an election may not be a good reason to make changes in your investment portfolio, other factors can certainly lead you to take steps in this direction. For one thing, as you get closer to retirement, you may want to review your asset allocation – your investment mix – to determine if it’s still appropriate for your situation. You may want to shift some – though certainly not all – of your investment dollars from more growth-oriented vehicles to more conservative ones. Conversely, if you decide, well in advance, that you might want to retire earlier than you originally thought, you may need to invest more aggressively, being aware of the increased risk involved.
  • Follow a long-term strategy – In pretty much all walks of life, there are no shortcuts to success – and the same is true with investing. You need to follow a long-term strategy, based on your goals, risk tolerance and time horizon, and you need the patience and perseverance to keep investing in all markets – up, down and sideways.
  • Avoid mistakes – Many people think of an investment mistake as failing to “get in on the ground floor” of some company that grew to huge proportions. But it’s actually pretty hard to become an early investor of companies like these, many of which start out as privately held businesses, without any stockholders. Furthermore, companies with shorter track records can be much more unpredictable investments. However, you do want to avoid some real mistakes, such as chasing “hot” stocks. By the time you hear about them, they may already have peaked, and they might not even be appropriate for your needs. But the biggest mistake of all is simply not investing. If you consistently put all your funds in a savings account, or some other “cash” vehicle, you almost certainly won’t achieve the growth you need to reach your goals, such as a comfortable retirement.

Elections come and go, and laws change all the time. As an investor, you shouldn’t ignore these events, but you won’t want them to dictate your decisions, either. In the long run, try to “cast your ballot” for those choices that can enable you to make progress toward your important goals. For help in making these moves, contact an Edward Jones financial advisor.

Important Information:

1 Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs: Federal Reserve Board: “Alternative Estimates of the Presidential Premium” (pdf)

2 CNBC: “Here’s Why Investors Should Hope for Washington ‘Gridlock’ on Election Day”

More Resources:

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