You may be tempted to change your investments around due to the perceived riskiness of the stock market during an election year. However, that would not be in your best interest.
Volatility of Stock Market During Election Years
For whatever reason, it feels like the stock market is more risky in election years than all other years. Perhaps this is due to media reporting or turmoil amongst politicians. Whatever the case, the sentiment is real.
In reality though, the stock market (S&P 500) is actually slightly less risky in election years than in non-election years.
Since 1928, there has been 23 elections. The average volatility during these years, as measured by standard deviation, is 15.6%. In non-election years though, the average is 15.8%. But for all intents and purposes we can say that the stock market is no more, or less risky during election years.
Returns of Stock Market During Election Years
Many people feel the need to move their investments to cash during election years until things settle down. They fear that they will lose money due to the volatility (which I’ve already discussed is not really a thing).
However, if we look at the historical return of the stock market during election years, it averages 11.3% per year. Granted this is lower than the 12.4% per year average return during non-election years, but it’s not a reason to abandon the stock market. After all, who wouldn’t want to earn 11.3% per year?
And if that weren’t enough, many people tend to wait until after the election is over to invest; however, the average return of the following year is far lower at only 9.9% per year.
There are many factors that affect stock market performance. Sure, elections are one factor, but there’s also oil prices, pandemics, natural disasters, wars, global issues, and many other things.
Instead of not investing based solely on an election, stay in the market and capture the returns that are usually provided.
Let me know how you plan to handle your investments as we lead up to the election. Please leave your comments below.
Brad Tinnon
CERTIFIED FINANCIAL PLANNER™
2 thoughts on “How to Handle Your Investments in an Election Year”
I have been guilty of letting my emotions and media negativity influence my decisions in the past. I am trying to remove those “feelings” from my financial decision making process, but it is a challenge. I always appreciate a data-based analysis to put things in perspective.
Emotional decision making in all areas of life is almost always a bad idea. The media is great at pulling the heartstrings, but they can lead a person down the wrong path, especially when it comes to investing. A data-based approach, as you mentioned, oftentimes leads to a better investment experience.