Politics of the Stock Market: Should We Time This Election?

Disclaimer: This is a post about the politics of the stock market, it is not at all about politics. It is completely apolitical. I cannot state that enough.

Ok, with that being said, I have been getting texts and emails and seeing comments online that all follow the same gist:

The above text is from an incredibly smart colleague of mine. He taught, or at least tried to teach, me about the stock market way before I had my financial “enlightenment.”

And yet, he is still caught up in the politics of the stock market with the impending election as we are now six months or so from a new (although it feels a lot like deja vu) Election Day…

He is not alone. Go on any online forum and you will find just a ton of posts asking the same questions.

How do we alter our plan if so-and-so wins?

What if taxes change?

Will the Fed change anything based on who wins?

There is only one possible answer: We have no idea!

There is no way to know what will happen to the stock market based on the outcome of this election. Anyone who pretends to know is lying.

Don’t believe me? Think back to the Corona bear market when stocks dropped 30% or more. How many people did you hear predicting that the market would reach a record high just a couple months later? Not many. But that’s what happened.

Altering anything in your stock market portfolio based on the election/politics is timing the market

To reiterate, timing the market does not work.

It is a sure fire way to buy high and sell low. This is the opposite of what your actual goal is: to buy low and sell high.

No one has a crystal ball to tell the future. If they did, they wouldn’t give their advice away. Why? Because they would never need to work again from making so much money based on their stock speculating.

Remember, 80% of actively managed funds underperform passively managed funds

And there is no way to predict the 20% that will outperform ahead of time.

So, despite the fact that politics in the US remain very contentious and volatile, sticking to your passive investing strategy is the way to go. The politics of the stock market are a red herring. Nobody knows how any political changes will affect things. Everyone’s crystal ball is cloudy.

Historically, however, an election hasn’t really had any impact on the overall stock market…

In fact, I would suggest that you write down your prediction for what the stock market will do based on the election. Be as specific as possible. Then check if you were right or wrong afterwards. How will your crystal ball do?

So how did I respond to my friend?

I’m not changing a single thing. I have a written financial plan with a set asset allocation that calls for me to rebalance once a year. I invest in low cost, broadly diversified index funds. In fact, check out my actual stock portfolio here. That is how I invest and how I will continue to do so.

I know that the stock market will go up and down and have short term volatility. But I also know that in the long run, over the many years I have left in my investing career, the stock market trends up. I am betting on the ingenuity of humankind and the world economy. It’s a pretty safe bet that holds up to the political winds of any moment in history.

My written financial plan also calls for a three month waiting period before any changes are made

This means that even if I wanted to change something based on the election, I would have to wait 3 months before doing so. By that point, any short term changes would have evened out, and changing anything would be rendered moot. This is a nice feature that I recommend you include in your written financial plan.

And finally we hit the real question, do you have a written financial plan?

It is very easy for me to answer the question if I should change anything based on the politics of the stock market. It’s really a no-brainer. I have a plan that I developed with my wife when cool heads prevailed.

When something unexpected comes up and emotions are running high, like during the bear market or an upcoming election, we aren’t scrambling to figure out what to do. Without a plan, it is only natural to feel that tinkering is the right thing to do.

So, what I am saying is please develop a written financial plan. It will take 20-30 minutes and help you immensely. My entire, actual, real written financial plan is here. Use it as a guide in creating yours. Keep, change, eliminate what you want and make it yours!

Here are some other great resources for investing in the stock market!

• Beta & the Stock Market: Does It Matter?
• The Best Stock Market Explanation I Have Ever Heard
• Top 10 Things to Do Instead of Watching The Stock Market
• Understanding the Stock Market: Firm Foundation vs. Castle in the Air Theories

Will you be changing anything in your stock investing plan based on the politics of the stock market? Do you have a written financial plan? Leave a comment below!