Now that a contentious presidential election has been decided, some investors may be tempted to make changes to their portfolios. Jumpy investors may let their emotions get the best of them and pull money out of the market, while others might re-shuffle their investments based on how the markets are responding to an incoming administration.
“There is some nervousness amongst individual clients, and perhaps even a feeling of threat,” says Bryan Jordan, deputy chief economist at Nationwide. “Although this seems like an unusual election, we hear similar things every election year, even though history suggests that a long-term perspective is most fruitful for investors.”
In an uncertain environment, clients may need reminders about the importance of maintaining their long-term perspective. It makes sense to start by reviewing the fundamentals of their financial strategy—including the goals they intend to meet, and why they are invested appropriately for those goals. But some clients could need additional reassurance.
Here are two ways to use market research to start conversations that can help calm nervous clients, allowing them to stay focused on their long-term plans during this intense political climate.
The financial cost of emotional investing
The tendency for investors to react to uncertainty isn’t uncommon—but it’s almost always unproductive. One way to emphasize the risk of making emotional investment decisions is to share with clients data that quantifies the impact of this behavior.
DALBAR’s Quantitative Analysis of Investor Behavior (QAIB) report provides a clear reminder by measuring the difference between the market’s return and the average investor’s returns. The most recent study shows that over the last 30 years, the S&P 500 has earned an average annual return of 10.35%, while the average equity mutual fund investor has only earned 3.65% over the same period. The primary reason investors trail the market return by so much, according to DALBAR: Investor behavior, such as panic selling, overly exuberant buying and attempts to time the market.1
For clients tempted to cash out or try to capitalize on short-term market fluctuations post-election a conversation about this data could persuade them to stick with their current strategy.
Staying invested pays off historically
Even if you convince your clients to stay the course, the markets may be volatile following an election. While no advisor can predict or promise future market outcomes, you can offer your clients data showing that historically, market fluctuation during presidential transitions is short-lived and generally linked to larger economic issues, rather than the election itself.
For instance, the S&P 500 fell 15% in 2001 as George W. Bush served his first year as president; however, this market movement was largely driven by the terrorist attacks of September 11th and the burst of the dot-com bubble. Meanwhile, during Barack Obama’s first year in the White House in 2009, the S&P 500 rose 23%, but much of this recovery was driven by fiscal stimulus and actions taken by the Federal Reserve.
Looking back further, the U.S. has had 10 presidents since 1952, during which time the markets have appreciated considerably. Research shows that people who’ve held their investments over time have enjoyed substantial returns. Investors who invested only when one party held the White House, and pulled out when the other party took office, would have earned less than 20% of market gains since 1952.2
Remind clients that the outcome of an election is only one factor of many influencing the market. Investors who develop an appropriate mix of investments for their goals and who stick with that strategy over the long term are the ones who are more likely to enjoy better outcomes—no matter which candidate wins the election.
“I would stress that investors look at the underlying fundamentals rather than just who is at the top of the executive branch of government,” says Jordan.
1http://www.dalbar.com/Portals/dalbar/cache/News/PressReleases/QAIB%202016%20Press%20Release%20v1.pdf
2 Source: FactSet (from https://nationwidefinancial.com/mutualfunds/tcm/static/MFM-2370AO%20Post-Election%20CS.pdf)
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