Every four years, the United States votes to elect a new House of Representatives, one-third of the Senate, and potentially a new president. The two political parties have different agendas, and policies implemented with new representatives and a new administration will affect your financial life. It’s normal to feel anxious or nervous about the election, regardless of whether or not your chosen candidates win or lose; financial markets don’t like uncertainty, and that uncertainty can create volatility. Luckily we have over 200 years’ worth of election history to examine, and past results can teach us a thing or two about what to expect in November and beyond.
Will the next president crash the stock market?
Fidelity went all the way back to 1789 using a combination of S&P 500, Dow Jones Industrial Average, and Cowles Commission data. They found that the first two years of a presidential term tend to have slightly lower stock market returns than average, but found no partisan difference in market returns. No matter whether a Democrat or Republican was in office, market returns over the long-term were nearly identical. The political makeup of Congress didn’t matter much either; whether Republicans swept the House and Senate, Democrats did the same, or there was a divided Congress, stock market returns were remarkably consistent over time.
History tells us that stock market returns have little to do with which political party controls the White House, Senate, or House of Representatives. The market does care about fundamentals, such as corporate earnings, interest rates, labor growth, and economic productivity, and although these factors may impact stock market returns, they are all out of your control. So what can you control, and what is really impacting your financial life?
Focus on what you can control
The return of the investments in your portfolio are largely outside of your control, but there are certain elements of your portfolio you can and should control. “Risk tolerance” and “risk capacity” are terms that get thrown around a lot when discussing investment portfolios, but what do they actually mean? Risk tolerance is your personal tolerance for risk, or the degree of uncertainty you are willing to accept in exchange for the opportunity for higher returns. Risk capacity is the amount of risk you must take to achieve your financial goals; sometimes risk tolerance is lower than risk capacity and sometimes it is higher.
When the stock market is doing well, we are vulnerable to taking on a distorted view of our own risk tolerance. When the market is seemingly only going up, it’s easy to accept more risk because our fear of missing out outweighs our fear of the market going down. When the stock market is doing poorly, the opposite is true: it is more difficult to accept a greater amount of risk when it appears that it is a losing bet. Your portfolio should be designed for all types of market conditions, both good and bad. When the market is going up it’s normal to feel like you may want to take on more risk, and when the market is going down it’s normal to feel like you want to move everything to cash. Fighting our own cognitive biases is perhaps one of the most important elements of being a successful investor.
How to election-proof your finances
No matter who wins the election this year, or in future years, the outlook for continued growth and innovation remains positive. With the amazing world we live in today, where our watches are miniature computers and our smartphones are more powerful than computers that took up entire rooms just a few decades ago, it’s easy to imagine that our society may have plateaued. How can it get any better than this? Although we may not be able to conceptualize exactly what innovations we’ll see in coming years, the Law of Accelerating Returns says they are coming, and they are coming fast. Innovation is actually accelerating, not slowing down; going by this Law of Accelerating Returns, the 21st century could achieve 1,000 times the progress of the 20th century.
Our minds think linearly instead of exponentially. It’s hard for us to understand the drastic rate of growth and innovation we’ll continue to see moving forward in the same way it’s difficult to conceptualize the return of money over a long period of time. The good news is we don’t have to fully understand this concept to take advantage of it; saving a little bit of today for tomorrow, and investing in the future of accelerating innovation and growth, has paid dividends in the past (no pun intended) and will continue to in the future.