When the markets are shaky, it can be tempting to rely on political headlines or pending legislation to time your entry or exit points. However, letting politics drive your investment decisions can be a costly mistake. Learn more about what helps market trends endure beyond political administrations and why you should ignore the noise and focus on your investment fundamentals.
Politics’ Long-Term Impact (or Lack Thereof) on Markets
How much do political decisions really impact the stock market in the long term? Not much, as it turns out. Although politically-charged situations like Brexit or the Tax Cuts and Jobs Acts did create momentary market moves, over the long term, the stock market has tended to trend upward regardless of the action (or inaction) taken by any particular administration or President.1 Political news can certainly contribute to short-term market swings, but—absent some independently-corroborated change to a stock or index’s fundamentals—the market’s initial reaction to political news is usually short-lived.
As a result, it’s important to tune out the “noise” of daily political news and instead focus on your long-term goals and investment horizons. Simply doing an internet search for “stock market crash in [year]” will yield dozens of projections and predictions of another Great Depression that never came to fruition. Listening to these types of political doomsayers can lead you to avoid a healthy amount of risk in your investment portfolio.
Stay the Course with Appropriate Asset Allocation
Volatility can be part of investing no matter who is in office. But if the amount of volatility in your portfolio makes you uncomfortable or triggers thoughts of cashing out after a string of poorly-performing days, it may be time to revisit your asset allocation to ensure that it appropriately reflects the amount of risk you’d like to take.
Being 100 percent invested in stocks can provide the opportunity for significant returns. However, stock indexes can decline up to 50 percent or more during a recession.2 Losing half one’s nest egg in just a few months can be enough to send anyone into a panic, and those who are retired or on a fixed income may not be willing to take this kind of risks with their savings. On the other hand, staying completely invested in CDs, money-market funds, or other “safe” investments can often mean losing ground to inflation.
The right balance of risk and guaranteed income will vary from person to person. Once you’ve reached an asset allocation you’re satisfied with, it can make it easier to navigate the ups and downs of the market without losing a minute’s sleep at night.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Asset allocation does not ensure a profit or protect against a loss. 1 https://www.nytimes.com/2016/04/26/upshot/how-politics-influencesthe-stock-market-not-very-much.html 2 https://www.forbes.com/sites/mikepatton/2020/03/30/how-stocks-performed-during-the-past-6-recessions/#5ac22ceb339d
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