By Jason Oshins, Financial Advisor, MBA
Most advisors are fielding the same question multiple times each day: “What should I do about my investments?”. With the election fresh on our minds, let’s review context and determine a prudent answer to this ubiquitous question.
Let’s face it, if 2020 were a song, it would be “Macarena”. Meaning, for most, it can’t end soon enough. We’re definitely in the thick of it. Everywhere you turn, people are talking about the state of the world. What if Biden wins the election? What if Trump is reelected? How will COVID-19 impact everything? What does all this mean for the country, for the world? What will become of jobs? What will become of the economy? What should I do with my money? Will the markets fall? Will they catch fire?
The world has no shortage of opinionated people. Punditry is synonymous with prognostication. High on confidence but low on accountability, these people predict what the future holds, as though they have a magic crystal ball. Think about what news attracts eyes and ears. Certainly, a positive it’ll-work-out message is far less intriguing than a negative sky-is-falling one. But, this is real life. It’s not about ratings or sales. It’s about each client’s future, and their retirement depends on it.
Let’s look at the “real” world, the one where we use facts and evidence instead of opinions and assertions. Otherwise, we’re at the mercy of the pundits and prognosticators, and this can wreak havoc on the psyche. In fact, we’ll see just how critical a role investor behavior plays on investor performance. When we look at returns, the market does what it’s supposed to do and behaves how it’s supposed to behave. The market isn’t the issue. Rather, the problem is human nature. When emotions drive decisions, we often make decisions that aren’t in our best interest. While we certainly should acknowledge these emotions, we must then use data and analytics to drive effective decision making.
So, let’s remove the emotion and look at historical performance during presidential election cycles. Returns in months of presidential elections are very similar to those in other months1. Furthermore, the market has historically appreciated significantly both during and following an election year, irrespective of the President’s affiliation. In fact, according to Dimensional Fund Advisors (DFA), the S&P 500 index from 1928-2017 had an average return during the election year of 11.3% and of 9.9% for the year following the election2.
Markets tend to reward disciplined long-term investors. Based on DFA’s robust data from 1926 to 2019, no meaningful difference exists in returns when investing over a five-year period after a record high versus returns over the same five-year period following a decline of 10% or greater3. Similarly, markets tend to reward investors before, during, and after election cycles.
Over the past 20 years, the average equity investor has obtained returns of 4.3% per year4. That barely beats the inflation rate of 2.1% over this same period. This means that investors have assumed significant risk to barely keep up with the purchasing power of a dollar. In comparison, the S&P 500 – no stock picking and no market timing – has returned on average 6.1% per year. Think about this – investors obtain returns that are lower than those they would have received had they just deposited a check into a fund that mirrors the S&P 500, taken a 30-year vacation, and returned to look at their investment statement. When we have an academically-sound, evidence-based mix5, the average rate of return is 7.7% over this same period6. What gives?
We know that remaining disciplined isn’t easy. In fact, it’s incredibly difficult, as irrational investor behavior leads to buying and selling at the wrong time. So, where does this leave an investor? The answer is surprisingly simple, but it sure isn’t easy. Success doesn’t require outsmarting the market. Success requires being rubber to the pundits’ glue and letting their harmful messages bounce off you. It requires avoiding the psychological traps that cause irrational behavior.
Nobody knows the impact of this or any election, and if they did they wouldn’t tell you. They would take this knowledge and monetize it. After all, by sharing it, it loses its value. Markets go up, and they go down. Market expectations – comprised of known information – already have been assimilated into securities’ prices. The market is incredibly efficient taking new information and adjusting these expectations.
The rules remain the same. Own equities. Diversify globally. Rebalance to the academic mix when the market goes up and down. And most importantly, remain disciplined. This is easier said than done, and for most investors – as evidenced by average investor returns – it requires working with an advisor and coach.
Dimensional Fund Advisors LP. “Presidential Elections: What Do They Mean for Markets?”, Oct. 28, 2020.
Dimensional Fund Advisors LP. “Market Returns During US Election Years”, 2020.
Dimensional Fund Advisors LP. “Is Now a Good Time to Invest”, 2020.DALBAR, Inc. “DALBAR’S 2020 Annual Quantitative Analysis of Investor Behavior”.
 DALBAR, Inc. “DALBAR’S 2020 Annual Quantitative Analysis of Investor Behavior”.
 This refers to, globally-diversified portfolios adhering to The Fama-French Three-Factor Model.
 Dimensional Fund Advisors LP. “Matrix Book 2020, Dimensional Core Wealth Index Model, 100% Equity”.
ABOUT THE AUTHOR
Jason Oshins is a Wealth Management Advisor and Certified Exit Planner with WestPac Wealth Partners. He works closely with clients throughout the country to increase wealth during lifetime, improve income during retirement, and provide a greater legacy upon passing, while also protecting their estates from taxes, inflation, and market volatility. He specializes in the areas of estate planning, investments, retirement planning, insurance planning and design, disability protection, long-term care, wealth transfer, and business planning. Jason obtained his MBA from the University of Michigan in Ann Arbor. He can be reached at (702) 470-2753 or by e-mail at firstname.lastname@example.org