Investors shouldn’t worry about the upcoming presidential election or let politics disrupt their long-term financial plans. Historically, financial markets have rewarded those who stick to their investment strategies. Surprisingly, U.S. stocks have often performed better during election years compared to non-election years. This trend is evident from historical data, which shows that losses in the stock market were less frequent during election years.
From September to election day, increased market volatility is expected, but this is not a cause for panic. The U.S. stock market has shown growth over time, irrespective of who holds office. Although past performance doesn’t guarantee future results, the extensive data on financial markets and elections can provide reassurance to investors.
Historically, while stocks performed better on average in non-election years, the likelihood of losses was significantly lower during election years. Data from BlackRock indicates that the U.S. stock market experienced losses in 30% of non-election years compared to just 17% of election years. Considering that annual returns have been negative about 26% of the time overall, election years appear less daunting.
According to Dimensional Fund Advisors, the S&P 500 performed nearly 1% better on average during election years compared to the year after. However, in both scenarios, staying invested resulted in double-digit returns, with returns during and after election years slightly surpassing the average returns across all years.
The performance of financial markets isn’t primarily driven by the current administration. While political uncertainty can affect the market, other factors like the economy, interest rates, geopolitical events, and the overall health of the financial system play more significant roles.
Investors should consider separating their political views from their investment decisions. Data from YCharts shows that a $10,000 investment in the S&P 500 in 1950 would be worth over $3 million by March 2024 (excluding dividends), with an average annual return of about 8%. Investing only during Republican presidencies would lower the average annual return to below 3%, while investing only during Democratic terms would raise it to around 5%. However, both scenarios yield lower returns compared to staying invested throughout all presidencies.
As the election approaches, it’s essential for investors to avoid getting swayed by dramatic headlines. Investments should be assessed based on their own merits, devoid of emotional influence. Remember, the election outcome might not significantly impact your portfolio, even if it doesn’t align with your political preferences.