Now that Democrats are in power, many investors are concerned about how the market may respond to the potential for increased taxes and regulations. Some investors may change their strategy based on potential outcomes, but that may not be wise.
Since 1933, stock markets have increased irrespective of which political party was in the White House.
With respect to Congress, the markets have performed similarly with both a split Congress, and a unified government, where Congress and the White House are of the same party.
And since 1945, both Republicans and Democrats have experienced positive market returns during their tenure.
This data demonstrates that there is no clear correlation between political party in power and stock market performance. However, there is very strong correlation between investor decisions and their personal rate of return.
Over the past 20 years, the average investor has earned 2.5% annual returns, just barely beating out inflation. This is because investors often buy securities after they go up in value and sell them after they go down. Doing the exact opposite of what disciplined investor do (buy on dips).
Given that investor performance is more influenced by our own decisions (in our control) than which political party is in power (outside our control), it would be wise to spend our time and attention ensuring we make wise decisions and controlling what we can control. Taxes may go higher for some in the future. In that case, a Roth IRA, Roth conversions and utilizing other tax advantages investment strategies could be very beneficial over the long run. Likewise, investing in companies and sectors that have more government tailwinds behind them and trim other positions with headwinds could turn out beneficial. Adding a principle protected safety bucket along with maintaining an adequate cash reserves are the base steps of a solid financial plan. After that, let your investments grow and give them time with the fortitude to stomach the ups and downs.
I am here to help devise the right plan for you. If you would like to review or discuss your situation, please schedule a meeting at www.promontoryfp.com.
©2021 The Behavioral Finance Network. Used with permission.
Information obtained from Capital Group. What the U.S. election means for investors. Nov 4, 2020