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If you were to take the news reporting at face value, you might easily believe that the upcoming presidential election is the “most consequential in history.”
It might be in the purely political sense, depending on what side of the issues you find yourself. However, in terms of your investments Election Day is no more meaningful than Arbor Day or the summer solstice.
Don’t believe it? Then believe the data.
Returns on a 60/40 portfolio of stocks and bonds from 1860 to 2010 were 8.2% annualized under Republican presidents. Under Democratic presidents the returns were 8.4%, according to Dimensional Fund Advisors.
Returns in presidential election years came to 11.3% annualized. Returns in the years following an election was 9.9%.
That’s not to say you won’t see volatility in the markets around what are perceived as big news events. What the data shows, however, is that ultimately volatility matters less than you might think.
What matters, really, is finding a way to look past the daily and weekly gyrations of the stock market.
Or, as the great Warren Buffett once put it, “If you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes.”
But, you might say, certainly there are stocks I should sell and others I should buy?
Of course, but that’s the brilliance of a widely diversified, low-cost portfolio, represented usually by an index fund or index-style exchange-traded fund (ETF).
Rather than try to pick winners and losers, index funds own all the stocks and all of the bonds. That is, they hold all of the “investable” stocks and bonds, which is to say the largest 500 stocks or the 1,000 largest “small” stocks, or perhaps 3,000 bonds.
Index funds own more of the bigger companies and less of the smaller ones, usually based on market capitalization, and they adjust those holdings over time to reflect size and importance.
The result is that you automatically own the stocks that matter in amounts that matter. If you have two or three or four different asset types in your portfolio — large stocks, small stocks, bonds, real estate — held as index funds, then the only “work” you do should be to occasionally rebalance among those categories.
Eventually, you will learn to ignore the news completely from the investment point of view and keep your sanity.
Whether you will learn to relax and ignore the political news completely is another issue, but if you’re having trouble sleeping at night your portfolio shouldn’t be the reason.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.