How could the next president impact the stock market?

No matter who wins in November, we will have a different president on January 20th, 2025. This uncertainty can be scary, especially since the result feels, for the most part, out of your hands. We have two major political parties in the US and, most likely, the next president will be a Democrat or a Republican. Does the stock market perform better with either political party in the White House? Let’s take a look at the data.

As you can see, the stock market has performed pretty well no matter which political party holds the White House. George W. Bush didn’t have a great run, but investors who bought and held stocks during that time period are still experiencing good returns today. Outside of that one outlier, the stock market performs pretty well over time no matter which party is in office.

I don’t want to understate the importance of elections, but as far as stock market investors are concerned, history indicates that the election in November will have little impact on the performance of the stock market over the long-term. Still, markets can become volatile leading up to elections and even if you know on paper the president shouldn’t affect stock market returns, it can be tempting to make changes to your portfolio to reduce risk.

Should you change your portfolio before the election?

If you are really nervous about a certain candidate winning in November, making changes to your portfolio in advance of the election might seem like a good idea. Moving to safer assets such as cash or bonds could reduce the volatility in your portfolio. However, it is generally a bad idea to adjust your portfolio allocation for one short-term event. If your plan was actually good in the first place, it should continue to be good, carrying you through short-term volatility. Historically, the data shows that whoever wins in November does not have a strong impact on how the stock market will perform over that president’s term, so shifting your allocation because your preferred candidate may not win could lead to a significant loss of long-term returns, potentially changing your possible retirement date, withdrawal amount, or ability to achieve personal financial goals.

Don’t take my word for it – just look at the data. The following chart shows what missing just a handful of days in the stock market could cost you in the long-run. We have no idea when the best days in the market will occur, and they can often occur following periods of volatility. Removing your money from the market for any length of time could cost you big-time if you miss some periods of great returns.

Your long-term investing strategy should be appropriate for your risk tolerance and financial goals. There may be a bigger conversation to be had if your portfolio doesn’t match your tolerance for risk or personal financial goals, but shifting your allocation based on who may win the election in November could be a very bad idea. If nothing else, crunch your numbers, be honest about your financial goals, and do not take this decision lightly! 

Focus on what you can control

Nobody likes feeling like they don’t have control over events that could greatly impact their lives, personal or financial. There are always going to be events and people out of our control that affect our lives. The key to feeling better about what you can’t control is to focus on what you can control.

There is so much about your finances that you have control over. You may not be able to control the direction of the stock market (even the president has very little control over that), but you do have control over what you choose to spend money on, how much you invest for retirement, and your own financial goals.

If you feel like you don’t have control of your finances, our Financial Order of Operations is a great place for anyone to start. Whether you are maxing out all of your retirement accounts and wondering if you are on-track to retire or are still struggling with high-interest credit card debt, the Financial Order of Operations can help you develop a plan of attack for getting your finances under control. We hope this is the start, a roadmap, for getting a great financial plan in place that will help you weather the short-term storms with more confidence!

Here are the nine steps of the Financial Order of Operations:

1. Cover your insurance deductibles
2. Get your employer match
3. Pay off high-interest debt
4. Build a full emergency fund
5. Max-out your Roth IRA and HSA
6. Max-out your employer retirement plan
7. Hyper-accumulation
8. Pre-pay future expenses
9. Pay off low-interest debt

Have any questions about how these nine steps work and how to tell which step you are on? We created an ultimate guide to the Financial Order of Operations to help answer your questions. For those that want to take the FOO to the next level with video lessons, homework, private live streams, and access to our exclusive Facebook group, check out the Financial Order of Operations course.

Are you worried about getting into the market at the “right time”? Historically, those who have stayed invested through the ups and downs of market volatility have been rewarded, even when compared to investors who attempted to time the market.

What is Timing the Market?

To be a successful market timer, you must buy assets when they are at their lowest price, let them grow, and then sell them when they are at their top price. While we do know that markets increase over the long-term (5-10 year timeframe), no one knows how short-term (daily – 5 years) market volatility will behave. If we knew how the stock market was going to act every day, market timing would be an easy feat. However, because markets are volatile and unpredictable in the short term, it is impossible to know the best time to get in and out.

Don’t Underestimate Emotions.

The majority of investors are emotional investors, which makes market timing really hard. When the stock market is doing well, most investors feel great because they see their account balances growing. As they experience this euphoria, instead of “selling high”, they are inclined to buy more into the market.

Conversely, when the stock market is doing poorly, many investors experience fear as they see their account balances drop. Mathematically, “sales” like these are the times to buy. However, many investors end up selling to make themselves feel better during this time of panic.

Is there an alternative to market timing?

Having the knowledge that investing can be unpredictable, volatile, and emotionally draining actually makes investing much easier for you. Brian and Bo are big fans of dollar cost averaging, or systematic saving. This process is nice because your emotions and decision making is done, allowing you to make logical decisions. When the market is doing well, you can feel good because you are participating in that growth. When the market is doing poorly, you can feel good because you are buying on “sale”. As the market grows over the long-term, you are able to be a part of it while efficiently put your army of dollar bills to work.

How do you dollar cost average? Set a savings goal (25% of your income, for example) and establish a regular savings pattern. This can be based on a date (i.e. same amount and date each month) or on an event (i.e. 25% of each paycheck). Most people dollar cost average naturally through 401(k) contributions (set contributions each paycheck) and IRA contributions (annual/systematic contributions). If you are saving to outside sources (i.e. a brokerage account), it may be worth setting up automatic withdrawal based on the timing of your paycheck.

Brian and Bo talk through the downsides to timing the market and how to make the most of your investments in the following videos!

Video: Stock Market is at an All-Time High! – Should You Be Worried?

Video: Why Timing the Market Doesn’t Work!

Volatility should not affect a great long-term plan!

We get it. When markets are in a volatile state, it’s easy to panic. It’s tempting to want to do something when the market starts to drop, even if it isn’t in your best interest. When things are scary and emotional, that is not the time to making adjustments.

A great financial plan should be prepared for any kind of market condition, so market volatility shouldn’t change your long-term plan. The best thing to do in most cases of volatility is nothing.

Volatile markets are a great time to take advantage of planning opportunities!

• A great buying opportunity. Stocks are on sale!! Remember you don’t have to get it exactly right, but if you get close, in the long term you will still be successful. If you have at least 5 years from retirement, you should still continue to move forward in the market, and keep investing as you planned.
• Dollar Cost Averaging. Especially powerful in a crisis driven market. By continuing a regular and systematic investing strategy, you can take the emotion out of volatile market behavior.
• Turbocharge paying yourself first. If you have extra savings capacity, downturns can be a great time to get those dollars in the market working for you. Be opportunistic, but don’t put your financial life at risk!
• Tax Loss Harvesting. This is the practice of selling a security that has a loss, and by realizing losses, investors may offset taxes on capital gains and/or income. Learn more from the video below!

Video: How to Harvest Losses to Lower Future Taxes!

• Great time to rethink legacy positions. Positions you received through gifts or inheritance that you have been stuck with. If these positions no longer fit into your model, volatility can be a great time to tax-efficiently get out of them.
• Rebalance portfolio. In volatility, your asset allocation may have gotten a bit out of whack. You may be able to use this time to tweak your allocation and get it back to where it should be. However, keep in mind, this is NOT the time to completely change your allocation and investment strategy.
• Roth conversions. If there is a safe level of Roth conversions you can do to not trigger any adverse tax implications, downturns are a great time to go ahead and convert. By converting when markets are suppressed, when the markets turn back around, you will have more growth in your Roth bucket.

Remember to learn from the experience of navigating historic market events! 

Wisdom comes from experience! Recognize how you reacted to the raw emotions from this situation and noise from the press and peers. Learning from past experiences will only make you a better investor in the future and prepare you for the next downturn!

Learn more about our experiences and response to downturns in the following videos.

Video: The BEST Financial Strategy During the COVID-19 Pandemic

Video: What CAN You CONTROL During Volatile Markets?! (Here’s The Answer)

In this highlight, we discuss how to stay motivated when you are investing in a down market.

Could we be headed for another stock market crash in 2022?! Nobody knows when the next market crash will be, but it’s important to prepare your money for anything. In this episode, learn how to manage fear and greed, and prepare your money and your emotions for the next market crash.

In this episode, you’ll learn:

• How to get your risk tolerance and risk capacity right
• How your personality plays a roll in your preparation for market volatility
• Why a diversified portfolio shines in times of volatility