Every four years in the United States we get to witness the spectacle called the presidential election. This cycle is shaping up to be one of the most contentious of all time, and emotions are flying high on both sides. As our response, here are our answers to the two most common questions we have received.
Should I Sell Everything Before the Election?
While it is true that we could have an opportunity to purchase equities at a lower valuation post-election, there are two factors working against you when trying to time the market. First, there is no guarantee that the market will react negatively to the election outcome. If you sell your shares now, you might be left waiting for a market correction that never happens.
Second, even if a market correction does happen, you must make your purchase at the right time. The downturn could last a few days, a few weeks, a few months, or even a few years. There is no way to know ahead of time what the “right time” is to buy. You have to be right twice in a row, which is like getting the flip of a coin right twice in a row: 50% * 50% = 25% chance. Not great odds.
We instead prefer to have a long-term view with an appropriate asset allocation, rebalancing the portfolio along the way to systematically buy low and sell high. This way there is no need to make predictions, and we keep the focus on the goal for the portfolio.
I Have Money on the Sidelines-How Should I Get Back in the Market?
First, you should make sure that you are matching your investments with your goals. If you are planning on using the money in the next few years, it should be invested conservatively. For longer-term savings, a more aggressive allocation is appropriate.
After you have determined an appropriate allocation, there are two ways you can get money back in the market. You can simply make a one-time change to the new allocation, or you can dollar-cost-average (DCA) into the market by buying a small amount of equities periodically until you get to the desired allocation. The DCA method allows you to spread out the purchases to minimize the chances of purchasing right at the market top. However, in an upward advancing market, you will see a lower overall return. Neither way is “correct” – the right choice depends on how you view short-term market losses.
So, Does the Election Matter?
In terms of a short-lived market event, the election will play a part. However, when zooming out to a longer-term perspective, any given year’s election results are just a small blip. What matters more are the economic conditions over time that drive business growth. On this front, the economy has grown whether we have had a democrat, a republican, or a split control of the government.
We remain committed to looking at the long-term perspective and guiding our clients to have appropriate portfolios, rebalance them over time, and have patience. The market works for you over the long run. To better understand how you can work on your long-term plan, let’s talk! If you want to learn more about wealth management, check out our previous blog here!