This season there is no short supply of concerns considering the election when it comes to your finances. What effect will the election have on the stock market? Should I get out of the market if Trump wins and everything crashes?
First off, this article is apolitical – we are not advocating for one side or the other. But in the interest of full disclosure, most of the questions this year are directed at a Donald Trump presidency.
The real question should be how much influence will the presidential election actually have on your personal finances.
The 2008 Stock Market Crash
In order to best predict the future, we must know our past. In this case, we really do not have to look any further than 2008.
In September 2008, Lehman Bros. fell, the stock market was completely rocked and we were in the midst of a presidential election. The financial crisis was the top story of the 24/7 “news cycle” and at one point, John McCain actually suspended his campaign to focus on the bailouts. It was without doubt a difficult period for all of us, and political tensions ran high.
We work closely with our clients, and this was a very busy period for us as financial planners because we were continually speaking to our clients and trying to help them remain calm and focus on their financial plans. A large part of our job at that point was to make sure that fear did not take the day and to help our clients control their emotions and stay in the market.
Unfortunately, that does not work in every single case. For instance, one client decided to leave the market because Barack Obama was elected. That person allowed politics to effect their financial life and they sat on the sidelines as the stock market doubled. Their inability to separate politics from their finances had a significant effect on them financially.
Politics and the Stock Market
Another example is the reaction to the “Brexit” vote. After the vote (keep in mind it was only a vote) the markets dropped swiftly. The Dow Jones dropped 900 points and the international markets fell near 10%. As you know, the markets quickly rebounded and are currently higher than they were before the “Brexit” vote.
These examples are listed to help realize that the stock market does not care about politics in the long run even though there can be short-term peaks and valleys. The stock market is nothing more than a vehicle to invest in companies, companies that you and I use everyday. They provide goods and services that people want and need all over the world. They are run by people and built to make profits. Ownership in the stock market is nothing more than owning these companies and sharing in their profits.
Presidencies and the Stock Market
The chart below prepared by Dimensional Fund Advisors looks at the market as measured by the S&P 500 over 15 presidencies (from Coolidge to Obama) that spans nine decades. As evidenced below, regardless of who has held the white house, the stock market has provided substantial returns over the long run.
Growth of a Dollar Invested in the S&P 500: January 1926 – June 2016
Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.
John Bogle, the founder of Vanguard, said it best:
“The stock market is a giant distraction from this business of investing.”
Remember, in a well-diversified portfolio you should own anywhere between 5,000 to 6,000 companies or more. You are investing in these various companies for long periods of time.
What Should I Do with My Investment Portfolio?
Regardless if you feel the market is going to go up or go down, the best way to protect yourself is to always have strong fundamental guidelines that you adhere to:
• Follow your financial plan
• Keep an adequate amount of cash on hand in case of emergency
• If retired, have your cash flow secured for the next 24 to 36 months
• Do not carry unnecessary or excessive debt
• Make sure your portfolio is globally diversified in low cost funds
• Use the ups and downs of the market to rebalance your portfolio
• Tax loss harvest if available while staying disciplined and focused on the long term
A financial planner not only helps you create and tailor a custom plan to meet your goals, we also guide you through financial decisions so you make better choices. We help you change your behavior so you adopt better money skills and avoid costly mistakes. Talk to your financial advisor or contact Foundation Wealth Management today – we can help you make sure your financial and investment plan is up to date regardless of who wins the election.