Political fear often raises questions about the safety of investments. As we move toward the 2024 elections, many are concerned about potential changes in policy, leadership, and global sentiment, which can impact financial markets. While it’s natural to worry about political shifts, history shows that fear-driven investment decisions can often do more harm than good. In this article, we’ll explore why political fear should not drive your investment strategy in 2024.
Should You Adjust Your Investments Based on Election Outcomes?
Investors often wonder if they should change their investment strategies based on election outcomes. A common fear is that certain candidates may influence market conditions, impacting investment returns. However, the reality is that the overall impact of a U.S. presidential election on the stock market is much smaller than many people think.
A recent example illustrates this concern. An investor, hesitant due to election-year uncertainties, chose to dollar-cost average into the market instead of investing a lump sum in stocks. They feared the potential market impact of the upcoming election. As a result, they missed out on a significant 23% return in the S&P 500 over the past year. Their decision to delay was driven by fear rather than factual analysis.
When it comes to elections, the market’s performance is not heavily swayed by whether a Democrat or Republican takes office. Historical data shows that over a two-year period surrounding an election, the difference in market performance between a Democrat and Republican presidency is only about 1.5%. This marginal variance suggests that other factors play a more critical role in market movements than the political party in power.
The Myth of Political Risk on Investment Returns
A common misconception is that political changes, especially during election years, significantly impact stock markets. However, history tells a different story. Since 1929, the market has been negative during an election year only four times. The two most recent instances were in 2000 during the Bush-Gore election and in 2008 during the Obama-McCain race.
In the 2000 election, the market downturn was not caused by the uncertainty surrounding the election but rather by the ongoing tech crash. Similarly, the 2008 crash had nothing to do with who was running for office; instead, it was the result of the collapse of adjustable-rate mortgages, credit default swaps, and the financial crisis. These events highlight that market downturns during election years are often due to economic fundamentals rather than political leadership.
The fear surrounding elections often leads investors to make unnecessary changes to their portfolios. For example, some consider moving to cash to avoid perceived risks, but this strategy often results in missed opportunities for growth. If your portfolio was appropriately allocated before the election season based on your risk tolerance and capacity, there is typically no need to alter it. The identity of the president has a minimal impact on the long-term performance of the stock market.
Focus on the Balance of Power, Not Just the White House
While the identity of the president has limited impact on market performance, the balance of power in Congress can have more significant implications. Who controls the Senate and the House of Representatives can affect policy decisions, taxation, and regulations, which, in turn, influence market conditions.
It’s crucial for investors to watch the distribution of power across the executive and legislative branches. Policies related to trade, taxation, and regulatory changes can influence specific sectors more than the overall market. Therefore, investors should pay closer attention to the broader political landscape rather than focusing solely on who sits in the White House.
Global Risks and Dollarization Concerns
Beyond the election, a more substantial risk that investors should consider is the process of “dollarization.” This phenomenon occurs when countries move away from the U.S. dollar as the world’s reserve currency. Recently, we’ve seen countries starting to explore alternatives to the U.S. dollar for international trade and reserves, raising concerns about its long-term value.
Despite these fears, it’s important to avoid making investment decisions based on speculative scenarios. Overreacting to potential shifts in global currency dynamics can lead to missed opportunities. Investors should not rush to make drastic changes to their portfolios, such as converting all assets into physical commodities like gold or silver.
Preparing for Potential Economic Policy Changes
If President Biden is reelected, there may be economic policy shifts that could impact certain areas of the market. For example, one concern is the potential reduction of Social Security benefits, estimated at around 20%, starting in 2030. Investors should prepare for this possibility by planning alternative income streams and hedging against potential Social Security cuts.
On the other hand, if former President Trump is reelected, market and policy shifts might take a different path. However, investors should still avoid making knee-jerk reactions based solely on election results. History has shown that markets have the ability to adjust and continue growing, regardless of which party holds office.
The Role of Physical Assets: Gold and Silver
In times of uncertainty, some investors turn to physical assets like gold and silver as a hedge against economic instability. Historically, holding around 10% of one’s net worth in physical gold and silver has been a strategy used to preserve purchasing power during times of currency devaluation.
For those considering this route, buying American Eagle coins is advised. These coins are considered lawful currency under the United States Constitution and cannot be confiscated, adding an extra layer of security. However, it’s important to note that physical gold does not generate interest or dividends, which can limit its long-term growth potential.
Even if you choose to include gold in your portfolio, it should only represent a small portion (around 10%) to act as an insurance policy. This allocation can provide some protection in case of a major economic downturn while still allowing the rest of your investments to grow over time.
Key Takeaways for Investors
- Don’t Let Political Fear Drive Your Investment Strategy: Election-year fears often lead investors to make poor decisions. Historical data shows that market performance is not heavily influenced by which party is in power.
- Focus on Allocation, Not Election Cycles: Adjusting your investments based on who might win the election can result in missed opportunities for growth. Stick to a long-term plan aligned with your risk tolerance and capacity.
- Watch the Balance of Power: The distribution of power in Congress can have a more significant impact on policy and market conditions than the president’s identity. Keep an eye on how the Senate and House are shaping up.
- Prepare, Don’t Panic: If concerns about dollarization or policy changes keep you up at night, make thoughtful preparations. This might include planning for potential Social Security cuts or considering a small allocation to physical assets.
- Keep Physical Gold as a Small Hedge: A 10% allocation to physical gold can act as a hedge against extreme economic downturns. However, it should not replace a diversified investment portfolio.
In conclusion, political fear should not dictate your investment decisions in 2024. Stick to a long-term investment strategy tailored to your individual goals and risk tolerance. The key to successful investing is to remain calm, stay informed, and avoid making decisions based on speculation and fear.
Also read: How to Sell Your Business, Plan Succession, and Retire Comfortably
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