Less than two weeks to go until November 3rd. We'll soon know who the next president will be! (Hopefully... it may take a while to sort out the results.) If you haven't voted already, make your plan to do so. It's one of our most important responsibilities as citizens.
Elections always lead to predictions about the effect of each candidate's policies on the economy and markets. Of course, which party controls the House and Senate matters as well. Should we let politics and predictions influence our portfolios? We don't think so.
Let's look at a recent Vanguard study. Vanguard compared returns for a 60% stock / 40% bond portfolio during election years versus non-election years - going all the way back to 1860!
The result - there was no statistically significant difference in returns between the two periods:1
- Average return during election years (40 periods): 8.9%
- Average return during nonelection years (120 periods): 8.1%
Given the horse-race nature of political campaigns, you may think that in the months closest to an election, there would be a noticeable uptick in stock market volatility (the range of up and down swings). In actuality, the opposite has been true. Vanguard's analysis looked at the S&P 500 Index's annualized volatility from January 1st, 1964 to December 31st, 2019.2
- Over the entire time period, the S&P's annualized volatility was 15.7%.
- In the 100 days both before and after a presidential election the S&P's annualized volatility was 13.8% - lower than over the entire time period!
The bottom line: Elections generate lots of headlines but should not sway you from following a disciplined financial plan. It’s understandable to have concerns, this year especially given the pandemic and how polarized our country is politically.
But as far as your portfolio and the markets are concerned, history suggests it will be a nonissue. Part of successful investing is focusing on what you can control, meaning maintaining perspective, discipline, and a long-term outlook - despite the short-run uncertainty that events such as elections can create.
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1. Source: Vanguard calculations, based on data from Global Financial Data as of December 31, 2019. Data represent the 60% GFD US-100 Index and 40% GFD US Bond Index, as calculated by historical data provider Global Financial Data. The GFD US-100 Index includes the top 25 companies from 1825 to 1850, the top 50 companies from 1850 to 1900, and the top 100 companies by capitalization from 1900 to present. In January of each year, the largest companies in the United States are ranked by capitalization, and the largest companies are chosen to be part of the index for that year. The next year, a new list is created and it is chain-linked to the previous year’s index. The index is capitalization-weighted, and both price and return indices are calculated. The GFD US Bond Index uses the U.S. government bond closest to a 10-year maturity without exceeding 10 years from 1786 until 1941, and the Federal Reserve's 10-year constant maturity yield beginning in 1941. Each month, changes in the price of the underlying bond are calculated to determine any capital gain or loss. The index assumes a laddered portfolio that pays interest on a monthly basis. Note: Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
2. Source: Vanguard calculations of S&P 500 Index daily return volatility from January 1, 1964, to December 31, 2019, based on data from Thomson Reuters. Note: Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only. Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.