Election years typically bring uncertainty for constituents, investors, and financial markets. While each presidential candidate's policies may impact the economy, the long-term effects on investment portfolios are likely negligible.
The S&P 500 tends to enjoy positive gains in the months before and immediately following a presidential election, regardless of whether a Democrat or Republican has won the presidency.
For this reason, staying on course with your big-picture investment strategy is more advisable than changing your investment portfolio based on short-term factors.
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TD recently released its Investor Pulse Survey in light of uncertainty leading up to the 2024 presidential election. The results found that younger investors were more likely to adjust their portfolios before the election than older investors were.
We spoke with Jim Beam, the U.S. head of investment management, brokerage, planning, retirement, and strategy at TD Wealth, to discuss how best to approach investment strategy and asset allocation amid economic and political uncertainty.
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How to manage investments during an election year
The year leading up to a U.S. presidential election season can create an unnerving political and economic environment as voters and markets brace for the impact of a new country leader.
The last few months of the most recent election cycle were even more eventful than usual: the Democratic candidate, President Joe Biden, dropped out and was replaced by Vice President Kamala Harris three months before the election. The Fed also cut interest rates for the first time in four years following a highly anticipated board meeting in September and then again two days after Election Day.
TD found that 21% of investors with at least $100,000 in investible assets planned to adjust their portfolio before the election, and another 24% planned to do so before the end of 2024. 71% of young investors — those aged 18-44 — noted they planned to shift their portfolio due to the election results, as opposed to 48% of those aged 45-64.
While it may be tempting to take a proactive role in managing your investments, Beam highlights why investors should cut out the noise surrounding the election results and interest rate cuts, staying true to their long-term investment strategy.
“During an election year, or at least leading up to the election, markets can be a bit more volatile, and that's due to the uncertainty around policy direction — especially in close races,” he explained. “Given how close we are to the election, I suspect changes that investors have made to their portfolios happened over the summer. Maybe even right after Labor Day, before the anticipation of the first Fed rate cut.”
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Though there may be market dips leading up to an election, the overall performance tends to be positive. Since 1972, the stock market has gained an average of 1.5% in the three months leading up to an election and 5% in the three months following an election.
“There are certainly investors that worry about volatility and may have allocated funds to more defensive assets, like treasury bonds, defensive equities,” he continued. “I think it's our job to ensure our clients stay the course and don't veer off too much. We call that the cash trap because you want to stay invested over the long term to achieve your goals and objectives.”
Historically, the results of an election haven’t materially affected portfolio value. Dating back to 1860, a portfolio comprising 60% equities and 40% fixed income has produced annual compound returns of 8.1% under a republican president and 7.8% with a democratic president. This is a minor difference, especially considering each party’s drastically different approach to economic policy.
While volatility is still likely, Beam notes that keeping a long-term vision can help recoup portfolio losses from market fluctuation.
“Just make sure that your portfolio's appropriate for what you're trying to achieve. Overarching changes probably are not the best in the face of noise created by the election or rate policy changes,” he explained. “When you have a long-term approach, investors rely less on making changes at every policy shift and stay the course, which usually wins the day.”
“There are certainly times when it's appropriate to make changes, whether based on a life event or larger economic trends. But it’s usually best to hold assets through short-term volatility to get optimal returns.”
Risk appetite differs between younger and older investors
TD’s data also noted that younger investors (81%) were far more likely to prioritize building generational wealth than older investors (64%).
Beam explains the increased risk appetite and desire of younger generations to build wealth through the backdrop of the economy of the last twenty years.
“I think Millennial and Gen Z investors are burdened by some of the economic challenges of the past two decades,” he said. “Student loan debt, rising house costs that are almost at all-time highs, credit card debt that does leave less disposable income for savings and the investments necessary to build long-term wealth.
“When there’s less capital available, you start to prioritize shorter-term financial stability, paying off debt, managing living costs over the long term,” Beam explained. “Wealth-building strategies like investments and home ownership have historically been a significant driver of wealth creation and even a way to pass on assets to future generations.”
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“I think the longer investment horizon for the younger crowd created a higher risk appetite,” he said. However, I also think some behavioral factors influence sentiment sensitivity. Younger investors generally have more time to recover from market volatility, which could make them more comfortable with more frequent portfolio adjustments.”
Beam highlights how young investors are likely more technology savvy and have access to trading platforms that only became widely accessible with the rise of the internet. The widespread access to information via social media may also influence frequent portfolio adjustments among younger generations.
“Loss aversion and recovery bias are more prominent among younger investors. They react to the news and speculation — especially during this election cycle — that may lead them to rebalance more frequently and get input from social media online forums.”
“Older investors, on the other hand, are probably focused on preserving capital stable income,” he continued. “So if you started investing in the 70s and 80s, it doesn't mean there weren't challenges. It just means you're probably working with an advisor and less inclined to take risks — not only because you're closer to retirement and the funds have a particular purpose that's well-defined. But you've already had that long-term goal in place that you're trying to stick to.”
Beam notes that the key to reaching long-term financial goals is creating a plan with specific milestones and sticking to it even in the face of volatility and uncertainty.
“I think it's essential to make sure you start to identify your goals,” he concluded. “Save as early as possible, even if only a little. The impact of compounding interest over time will be significant, and if you get behind the curve, it's really hard to catch up.”
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