What you will learn: In this blog post, you’ll discover why presidential elections have surprisingly little impact on long-term investment returns, debunking a common myth that political outcomes dictate market success. Learn how staying invested through election cycles, regardless of which party is in power, has historically proven to be a more effective strategy than reacting to political changes.
Every four years, the buzz around presidential elections stirs uncertainty among investors about the potential impacts on the stock market. One of the most enduring myths in investing is the significant influence of presidential elections on market performance. However, history and data suggest otherwise.
We are here to tell you that having an opinion on the election is your right, yet mixing those strong feeling in with your portfolio doesn’t work out well.
The Myth of Presidential Impact
It’s a common fear that the outcome of an election will drastically affect the stock market’s trajectory. Yet, time and again, the data tells a different story. Regardless of which party or president is in office, the broader equity market trends upwards over the long term. This observation holds true across decades of economic policies, administrations, and global events.
Statistical Insights
Consider the following scenario analyzed by Liz Ann Sonders and Kevin Gordon from Schwab:
A $10,000 investment in 1961 would grow differently depending on the presidential party in office:
Republican Presidents: The investment would have grown to $102,000 by 2023.
Democratic Presidents: That same investment would have reached $500,000.
Staying Invested Regardless of Party: Most importantly, had that $10,000 remained invested through all administrations, it would have ballooned to $5.1 million.
What Should a Rational Investor Conclude?
Presidential parties don’t significantly sway the market in the long run.
The equity market tends to grow over time, irrespective of political leadership.
The best strategy is to remain invested, focusing on long-term growth rather than short-term fluctuations.
Yes, that is right, just stay the course. You have a beautifully designed, globally diversified portfolio and a long-term financial plan to meet your needs. Ignore the noise or temptation to do anything.
Visualizing the Impact
GROWTH OF $1
S&P 500 Index 1926—2023
Past performance is no guarantee of future results.
The graph above illustrates the growth of the S&P 500 over several decades, marking different presidential administrations. Notice the overall upward trend, reinforcing the idea that staying invested is a prudent strategy.
Understanding Our Biases: Political Views and Investment Decisions
We understand all too well how smart, passionate people can allow their emotions around politics and their money to collide. Yet, there’s no reason to if the evidence is observed. A study from 2010 titled “Political Climate, Optimism, and Investment Decisions” demonstrates that investors’ political affiliations can sway their financial decisions—often to their detriment. When their preferred party is in power, investors feel more confident and vice versa. But reacting to these feelings can lead to poor investment strategies.
Charles Munger, a financial hero of many, including myself, famously said, “The first rule of compounding is to never interrupt it unnecessarily.” From the evidence, we know that making investment decisions based on presidential elections is one of these unnecessary interruptions.
Conclusion
Presidents and policies come and go, and the economic pendulum will continue to swing.
Through it all, superior companies keep serving their customers, increasing earnings, and raising dividends. That’s what we invest in. For our purposes, everything else is noise. Your well-developed investment plan should withstand the test of time and political change.
Stick to it, and avoid the common pitfalls that come with election-driven anxiety.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Cogent Strategic Wealth provides investment advice only through individualized interactions. Certain information is based upon third-party data, which may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. © 2024, Cogent Strategic Wealth®
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