Written by Tyson Ray, FORM Wealth Advisors | CFP®, CExP®, CIMA®
With the 2024 elections now behind us, we can breathe a sigh of relief that we are no longer subjected to all those mudslinging ads. As for the election results, you might be happy about them, or you might be distraught. If you are stressing about the results, I would like to caution you to stay the course with your investments and avoid overreacting.
In 2016, I met people who were unhappy with the election results. They overreacted and liquidated their portfolios. Others did the same thing in 2020. And here we are again, in 2024 — some people who are unhappy about the election results have liquidated their portfolios, while others are thinking about doing so.
If you are tempted to do the same, please don’t!
Market performance during election and non-election years
Many people get nervous and bail out of the stock market even before a major election has taken place.
Nasdaq reports that when we were a little more than seven weeks away from the 2024 Election Day, many investors were already starting to get jittery about their portfolios. In fact, 60 percent said they planned to reduce their portfolio risk until the election was decided.
It is a common misconception that political unpredictability trickles into stocks and leads to poor returns during election years.
Data from T. Rowe Price show that the S&P 500 performs only marginally better in non-election years. From Dec. 31, 1927, to Dec. 31, 2023, the market produced an average annual return of 11.6 percent in non-election years. For presidential election years, the average annual return was 11 percent, with the added benefit of S&P 500 returns being generally higher in the runup to a presidential election than in non‑election years.
Panic selling is never a good idea
When people bail out of the stock market as a result of something that happens in the markets and in the world that they aren’t expecting, it’s called “panic selling.” But time and time again, what happens next is always the same: the economy continues to grow. Why is that? Because millions of people continue to consume products and services that are a part of our daily lives. Our daily routines are not going to change as a result of whatever has happened.
Liquidating your portfolio because something happens that you weren’t expecting, or that you’re not happy about, is always the wrong thing to do. Bailing out of the market based on a short-term cycle of one, two, or four years will prevent you from benefiting from continued market growth.
Bank of America looked at data going back to 1930 and found that if an investor sat out the S&P 500’s 10 best days per decade, his or her total returns would be significantly lower than the return for investors who waited it out. Plus, the market’s best days typically follow the largest drops, meaning panic selling can lead to missed opportunities on the upside.
Reacting emotionally to what’s going on in the world could cost you a lot more than staying in the market and riding out the storms.
Rely on your advisor for guidance
Guiding you through market fluctuations is just one of many ways your financial advisor provides priceless support to you.
When we first meet with you, we will determine your risk tolerance and then help you choose investments that aren’t likely to disappoint you in the long run. We also will diversify your choices, building your portfolio with a variety of asset classes, which can mitigate risk during market crashes. And finally, we can explore many different “What if?” scenarios with you before you actually invest any money. This can provide you with some insight into market volatility and your emotional response to it.
Timing the market is difficult — impossible, actually — during the best of times, even for the most experienced traders.
Instead of trying to time the market, and instead of panicking in reaction to situations, I want you to look past the election results and other occurrences.
Have you ever noticed that the days seem to pass slowly, while the years seem to fly by? We have to process these situations one day at a time and stay the course. Meanwhile, the years will continue to fly by, and the next thing we know, there will be another cycle — another election, another market fluctuation, another world conflict. I encourage you to avoid overreacting to whatever is happening around you.
As your financial advisors, we are here to help you process situations and make wise decisions for the rest of your life.
