You probably noticed how the U.S. elections defied the pollsters’ predictions, again. Guess what? Pundits predicting how investment markets will react to the election outcomes probably have an even worse track record.
Leading up to each election, there’s one thing I can predict accurately: Many investors will ditch their thoughtful investment plan due to election-related forecasts. And often, they get burned for it.
I know this because I have these conversations every four years. No sooner do I speak to someone who wants to go to cash because the market is about to plummet, I have a conversation with someone else who insists they need to buy more stocks because the market is about to surge. Both callers reach opposite conclusions by reacting to predictions made by their favorite media commentator, investment banker or well-intended friend.
Relying on predictions is not investing; it’s speculation.
Consider the week before and after the November 3 election. The week prior, the S&P 500 dropped 5.6%; its worst week since the pandemic-induced March decline. The week of November 3, it rallied 7.3%. Even as the outcome remained unsettled, the U.S. market staged its biggest election week gain since 1932. Do you know anyone who predicted that?
It could just as easily have played out differently because, collectively, the market is never focused on just one thing. Investors are looking at all sorts of factors at once – such as COVID-19 case counts, stimulus packages, vaccine news, blue waves (or lack thereof), and associated tax and regulatory expectations. Plus, different investors can interpret any or all of these as good, bad, or indifferent news. It depends on their personal perspectives as well as on the spin added by the sources they frequent.
In other words, with so many forces continuously shaping and reshaping stock prices, investors are best served by riding out politics and pandemics with a thoughtful plan for capturing the market’s long-term expected returns. Reacting instead to fleeting, politically charged events only leads to mistakes and lower chances of reaching goals. As Dimensional Fund Advisors’ David Booth recently suggested, “Vote with your ballot, not your life savings.” [Source]
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