Is the current political race getting in the way of your financial plan? There is a glut of data available about what the markets will do in and after an election year. Depending on the way the data is manipulated, one may come to the conclusion that the market itself predicts the presidential election or that the party in office dictates the ensuing returns. If you’re paying attention to pundits, you may well want to sit on the sidelines while things shake out.
Ultimately, that decision lies with you. But consider the following propositions before you vote on a specific action — or inaction.
Markets tend to be party-neutral over time
Although market cycles and presidential elections are regularly occurring events, there may not be a direct correlation between the two. In fact, based on data from Morningstar®, the S&P 500 Index’s average annual return was negative in only four election years; in two — 1940 and 2000 — a Democrat was in office, and in the other two — 1932 and 2008 — a Republican was in office.
Otherwise, the average return during the last 21 presidential election years is 11 percent, which is very close to the average return of all years between 1925 and 2011, based on return data from Standard & Poor’s.
The upshot is that, when it comes to investing, an election year is about as good as any. What’s more important to consider is the potential for missed opportunity if you try to time the market around the elections.
A vote against timing the market
Unless you have a crystal ball, attempting to gauge the right time to get in or out of the market can be a losing proposition.
From the White House to your house
Regardless of who lives in the White House, most of us are more interested in our own financial house. There are numerous factors that can affect your long-term financial strategy. The top four are:
Inflation. In order to maintain your standard of living over time, your assets need to keep up with inflation. Inflation is generally measured by the Consumer Price Index (CPI), which jumped from 1.6 percent in 2010 to 3.2 percent in 2011. It’s widely thought that inflation will remain low for some time; however, keep in mind that the CPI does not measure two consumer goods near and dear to your bottom line — gas and groceries.
Interest rates. The federal funds rate, influenced by Federal Reserve policy, dictates short-term interest rates. Interest rates are low and are expected to remain so for some time, which is good news if you have outstanding debt that can be refinanced. It could also mean, however, that your investments in fixed income may be producing a yield lower than the rate of inflation.
Market volatility. Peaks and valleys aside, over the long term the market has remained an effective hedge against inflation. As previously discussed, it’s easy to panic when things get bumpy, but reacting to fear can result in lost opportunity.
Taxes. Tax increases are always a concern, no matter who is commander in chief. A financial professional can advise you on the best mix of taxable, tax-deferred, and tax-free investments for you.
A trusted adviser can help you develop a strategy around all of these factors — and more. Even the best politician would be nothing without advisers and strategy, so embrace the spirit of the election by adopting these two timeless tactics.
And remember ... presidential candidates and agendas are based on four-year plans, but your personal financial plan is based on a much longer timeline. The White House ultimately does not legislate what you do in your house as far as saving, making wise choices, and seeking help where you need it. So, ask yourself: Will your current strategy last as long as campaign promises or throughout the long term?
Kevin M Dick is a wealth adviser located at Kevin Dick Investment Management Group. He offers securities and advisory services as an investment adviser representative of Commonwealth Financial Network®, Member FINRA/SIPC, a registered investment adviser. He can be reached at 928-474-4350 or at kevin@ kevindickimg.com.