Investing during an election year can cause one a great deal of uncertainty.
Drew Bax, CRPC®
Assistant Vice President
LPL Financial Advisor
Investing during an election year can cause one a great deal of uncertainty. From market volatility to policy uncertainty, investors often wonder how to position themselves. While elections introduce uncertainty, they also present opportunities. Let’s explore some historical returns and strategies that you should consider when you are looking at your portfolio.
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Market Returns During Election Years
Although you may face some uncertainty during an election year, history shows that neither the occurrence of an election nor the party elected significantly impacts market returns. According to an article from Investopedia:
- From 1928 to 2020, the market has been favorable 20 out of 24 election years, which amounts to 83.3% of the time.
- The average return during these years has been approximately 11.58%.
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Investment Strategies for Election Years
While the market may be more volatile than normal during an election year, it is important for you to stick to your plan and focus on variables that truly influence markets. Consider the following strategies when you’re going through an election year:- Diversification:
- Rather than chasing short term trends, it is important to maintain a diversified portfolio. Spread your funds across different asset classes like stocks, bonds, real estate, and commodities. Having a diversified portfolio can help manage volatility, especially when it comes to political risk.
- Long-Term Perspective:
- Remember that elections are just short milestones along your investment journey. They may create short-term volatility, but by keeping a long-term perspective, investors can avoid making emotional reactions that can be detrimental. Individuals need to remember that successful investing is not a sprint, but a marathon.
- Rebalancing:
- During times of market volatility, it is important to periodically rebalance your portfolio. Rebalancing your portfolio ensures that your asset allocation is aligned with your risk tolerance and investment goals. When the market fluctuates, it can cause some assets to become over or underweighted. Rebalancing maintains your desired asset allocation.
- Diversification:
By understanding historical patterns and keeping your investment plan intact, you can navigate these times of volatility with confidence.
Category: Investing
Investing involves risk including the potential loss of principal. No investment strategy, including diversification, asset allocation and rebalancing, can guarantee a profit or protect against loss. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio; it is a method used to help manage portfolio volatility.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Investments in real estate may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Other risks can include, but are not limited to, declines in the value of real estate, potential illiquidity, risks related to general and economic conditions, stage of development, and defaults by borrower.
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
