Election Season Danger

Good Morning Relaxing Retirement Subscriber,

Elections have the ability to stir up emotions like nothing else, and this mid-term election certainly didn’t disappoint in that regard.

While political debate is healthy from a democratic process perspective, it can be very dangerous if you allow politics to influence your investment decisions.

There are two quick examples of this I see quite often which you have to guard against:

  1. The first occurs during times like these when the political season is in high gear, our emotions run high, and we make predictions about the trajectory of stock market prices based on which party will win, or which party just won the election.

    Although we subjectively want to believe otherwise, if you go back and study stock market returns during various presidencies and various mixtures in congress, you can’t find one common thread among them except that their results are mixed.

    Given this, election results can’t be part of your long-term investment policy decisions.

  1. The second example includes what appears to be a useful objective statistic you may have come across: Since 1926, the S&P 500 Stock Index has risen in just shy of 65% of all calendar quarters. However, in the 4th quarter of mid-term election years, and the first two quarters of the following year, the S&P 500 Index has risen 87% of the time.

    While this statistic could be perceived as encouraging, it doesn’t provide you with useful information to formulate your investment policy for two reasons:

      • First, if you are already fully invested and allocated prior to the third quarter of a mid-term election year (as you should be), you don’t have the capacity to invest “more” to take advantage of this “phenomenon.”
      • Second, if you are not fully invested at the moment, this had to be the result of your belief in market timing as an investment strategy, i.e. that you can successfully navigate in and out of equity markets to capture all upside returns while avoiding corrections and crashes.

        Market timing has proven to be an impossible strategy to successfully implement over time.

        According to extensive research by noted Dartmouth Professor Kenneth French, in order to successfully do this, you would have to be precisely correct on the sell and buy points 74% of the time in order to equal returns earned by continuously holding shares through all market cycles.  A survey of famous market timers revealed that only a handful were correct more than 50% of the time, and the best was still only at 66%.

The bottom line with both is that, while they both generate terrific conversation pieces, you have to be very careful not to let either influence your long-term investment policy decisions.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)