Elections can have consequences, but historically the impact on investor portfolios, including 401(k)s, has been minimal. A recent analysis from retirement planning firm TIAA looked at a moderate-risk portfolio with 60% stocks and 40% bonds across all presidential election years since 1928. Only four years had negative returns, coinciding with major events like the Great Depression and World War II. However, these negative returns haven’t significantly affected long-term average performance, with the average annual return for a 60/40 portfolio being consistent across election years and non-election years.
Even shorter time horizons show a similar trend, with the S&P 500 generating an average return of 7% during presidential election years since 1952. When the incumbent president is running for reelection, this average jumps to 12.2%, possibly due to fiscal stimulus and pro-growth policies leading up to the election. The implications for this year’s election are uncertain, as higher volatility is expected. The market will likely consider fundamentals such as economic growth, corporate profits, and geopolitical risks in the decision-making process.
While the election results can impact market sentiment, economic and inflation trends have historically had a stronger correlation with market returns. The makeup of Congress will also play a significant role in policy implementation, regardless of the president’s promises. It’s wise to be diversified across asset classes and sectors and avoid making investment decisions based on predictions about the election outcome. Consult with a financial advisor to ensure your portfolio aligns with your goals and risk tolerance.
Psychologist Daniel Crosby, author of “The Behavioral Investor,” offers tips on avoiding emotional decision-making in investing. Fear and optimism can lead to poor choices, such as selling in a panic or underestimating risks. It’s important to stay focused on long-term goals and avoid reacting impulsively to short-term events like elections. By maintaining a disciplined approach and seeking professional advice, investors can navigate through election cycles with confidence and avoid making costly mistakes based on emotions.
