How Will the Election Affect My Investment?
A pandemic without a vaccine, a prolonged economic downturn and now a large number of mailed ballots threaten to turn Election Day into Election Month. Amidst all this chaos, what should an individual investor do with his portfolio in the midst of all this chaos: adjust his US stock placement or stay on course?
“While electoral noise may be troubling, we do not believe that any potential election results should be a reason to go against market fundamentals and significantly alter portfolio allocation,” advises Principal Global Investors at recent policy note .
Investors may face problems overly emphasizing election results that have historically had a short-term impact in terms of volatility. The problem with betting on the outcome is that it involves too many scenarios to consider: the Senate, House of Representatives and the White House are all to take over and can be won by either side, and any combination of these scenarios affects the legislative agenda. … otherwise. And none of these scenarios account for the actions of the Federal Reserve.
There is, of course, a real risk, especially if voting irregularities and mail delays lead to a protracted legal battle over a narrow margin, as we saw with Bush Gore in 2000. On the other hand, the likelihood of winning could be big enough to spare us that much suffering, even if this scenario doesn’t fit well in 2020. We just don’t know. An election is a risky event, with good and bad outcomes.
Analysts tend to view Biden’s victory as optimistic for utilities, green energy and healthcare, and Trump’s deregulation program as a benefit for the energy sector and financial technology, but there is no guarantee that any of this will happen.
“Our research shows that adjusting the portfolio allocation to determine who is most likely to win is a dangerous strategy,” warns Principal Global Investors. In other words, if you’re a committed long-term investor, do less for more.
Overestimate your risk tolerance
You might not want to pick winners and losers, but should you reduce your overall exposure to US equities? It depends on your risk tolerance. Finding the right balance of stocks, bonds and cash depends on your time frame and risk appetite. Ask yourself the following questions:
- How much has your financial situation changed since the start of the pandemic?
- Think about your most important financial goals in life and estimate when you will withdraw money from your account. How much do you need?
- Are you planning to withdraw your investments in the near future?
- Can you deal with investment fluctuations over time?
If the planned withdrawal date is still many years away, you may be comfortable with a portfolio that carries a higher risk in exchange for a potentially higher valuation. However, with shorter maturities, you might want to reduce your exposure to US stocks and invest in more bonds or cash.