Investing in an Election Year

Historically speaking, election years tend to be positive in terms of stock market performance. And this election year is holding true to historical patterns, so far. But this may be entirely coincidental and not reflective of any real or direct impact that elections have on stock prices.  If you think about it, correlation of elections to company profits and/or growth does not equal causation.

Despite that, plenty of investors question how they should adjust their portfolio during election years.  The simple answer is that if you already have a well-thought-out investment strategy, there is nothing you need to do differently.  Setting specific investment goals and working thoughtfully to achieve those goals means not having to tune into the noise around political events.  It’s also important to remember that it doesn’t particularly matter who wins in November, as the stock market continues to go up (and down at times), regardless of the party that has the presidency.

That doesn’t mean elections do not influence markets, because they do.  What we are talking about is the real and perceived impact of different policies and changes to laws.  A lot of market volatility is based on how people react to the risks that change implies, particularly as it applies to their portfolios.

One area of concern that might impact investment decisions is the expiration of the Tax Cuts and Jobs Act of 2017, which is due to sunset at the end of 2025.  Depending on the outcome of the election, the tax policy could be extended, amended, or allowed to expire.  Businesses may have lower tax rates or much higher ones.  Even if you are clear what the different party tax policies might look like, if the opposing party is in control of Congress, it is likely that very little change will occur.  In short, it is very hard to determine not only what is going to happen, but what the impact will be on companies, stock prices, and the market in general.  With so much uncertainty around potential tax changes a year out, you may be tempted to make some portfolio changes now or in the next year.

For most retirement plan participants, the potential market volatility isn’t anything to react to, especially if you have five to ten years before accessing your investment balances.  An annual rebalancing to address your target allocation (how much in stocks versus bonds), any style imbalances (since growth has well outperformed value since 2007), and geographic allocations is always a good idea and may help reduce portfolio volatility in the process.  Don’t have a target or goal for your investments?  Maybe now is a good time to set a goal and evaluate how your portfolio is growing.  But if you are closer to retirement and think you will need to use these balances for cash flow needs, you may want to look at increasing amounts held in cash equivalents, just in case.  Studies show that retiring into down markets can have a devastating effect on the portfolio’s ability to meet long-term cash flow needs.  Raising enough cash to get through a year or two of income needs may help the portfolio withstand shorter market movements.

If you are eligible to make Roth contributions, you may want to consider doing so in the next year.  Since it is likely that tax rates will go up at some point, having some money stashed in a tax-free option will help give you some income flexibility in retirement.

In short, investing in an election year should look no different than it does in any other year.  However, if you are looking for a reason to do a portfolio check-up, consider the potential volatility that elections  may produce as reason enough to take action.  We are always here to help with your portfolio rebalancing and to answer your longer-term retirement questions.

Meet Kristan Anderson, CFP®, CEBS® » 

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