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It’s a common theme during election season: this candidate (or that candidate) spells doom (or boon) for your 401(k). While this may be the soundbite you hear, digging deeper will allow you to discover the justification for the concern (or the promise).
This presidential election is no different.
“It matters who wins the election from two standpoints, performance and regulation,” says Ryan D. Brown, a partner and attorney at CR Myers & Associates in Southfield, Michigan. “Some financial analysts have predicted that the market will not receive a Biden victory as positively as it would with a Trump re-election. From a regulatory perspective, Biden has indicated that he will be tougher on Wall Street with new laws, rules and tax proposals.”
The reason for this tactic is simple. Fear or greed tend to motivate people the most. If you want to get people to vote for you, you’ve first got to motivate them.
While this might make sense for a political strategy, it may be less relevant for an investment strategy that spans decades. In fact, it can be worse than you think.
“Paying too much attention to politics can be harmful to your wealth,” says Robert R. Johnson, Professor of Finance in the Heider College of Business at Creighton University in Omaha. “Around the time of elections, investors tend to get laser focused on specific policies of candidates and attempt to determine how those policies will affect the economy and ultimately the capital markets. Four years ago, when I was President of the American College of Financial Services
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, a colleague was so worried about a Hillary Clinton presidency that right before the election he moved his stock portfolio entirely into cash. We all know how that ended as the market advanced during the first three years of the Trump presidency.”
As a rule, you should avoid any kind of market timing. Although certain policies may temporarily boost or deflate a very narrowly defined group of stocks, the impact of this kind of volatility tends to smooth itself out over time.
“Outside of certain industries who might see job losses with one of the candidates, this election should not impact long term plans as one should be saving for retirement regardless of who’s in office,” says Rob Schultz, a financial planner in Encino, California.
This should relieve you as it means your retirement savings will likely grow at very nearly the same rate over the long term regardless of who happens to win this or any other presidential election.
“When it comes to the long-term impact on retirement savings, it doesn’t really matter who wins this election,” says Craig Kirsner, President of Stuart Estate Planning Wealth Advisors in Coconut Creek, Florida. “If you don’t need your retirement money for 10 or 20 years or more, then in reality the short-term gyrations of the stock market shouldn’t really affect you. Many people use the past 100 years to show that it doesn’t really matter who wins the election.”
You may read some statistics suggesting the market performs better under one party versus the other. This is certainly true if you limit yourself to looking just at the raw data.
“The historical record and the research on the divide between stock market performances assessing Democrat and Republican administrations is clear,” says Mark Hamrick, Senior Economic Analyst for Bankrate.com in Washington D.C. “Investors have seen more generous returns from equities when Democratic presidents were in the White House going back to 1945 (per research from CFRA). Whether that is a case of correlation or causation will be left to others to interpret.”
The markets, however, move for a variety of reasons.
“Comparing returns during a Democratic presidential administration versus a Republican presidential administration is fraught with problems,” says Johnson. “First, the sample size is small. Second, looking at one variable – party of the president – ignores a plethora of other factors. For instance, my published research shows that Federal Reserve policy explains the lion’s share of returns whether the president is Republican or Democratic. Specifically, when the Fed is accommodative, stock markets tend to perform much better than when the Fed is restrictive. The bottom line is that the president gets too much credit when the economy is booming and too much blame when the economy is lagging.”
More importantly, the fact that stocks moved in a certain manner during past administrations doesn’t allow you to extrapolate those same movements for future administrations.
“The mistake a lot of investors seem adamant on making these days is thinking that the person and policies of the president are importantly correlated to the stock market,” says Humphrey G Thomas, CEO of HG Thomas Wealth Management, LLC in Brownsville Texas. “There is zero basis in fact for this conviction, but at times like this, facts go out the window. So the simple answer is No. The President nor the Congress, nor the Supreme Court cannot force a company to operate at a loss of any length of time. No matter who gets elected, nor what his policies, superior companies will continue to thrive by acting in their shareholders’ best interest.”
So, who should you listen to if you’re still convinced the past data offers significant insight? And what does that tell you about your own retirement savings?
“This is similar to the disclosure provided by many financial service firms: Past performance is no guarantee of future results,” says Hamrick. “During this year like no other, the stock market’s broad averages have rebounded in part because of the strong backing of the Federal Reserve, through record low interest rates and multiple rounds of economic relief legislation. Since most investors look to the stock market for retirement savings, the game plan for most should be to focus on the long-term to maximize their retirement security.”
In addition to this, there’s a political reality that comes into play. The President can only do so much without the consent of Congress. Remember this: anything that goes through Congress takes a long time.
“All that glitters is not gold when it comes to what sectors you might expect to benefit or be hurt by a President,” says Tim Barron, CIO of Segal Marco Advisors in Chicago. “Campaign narrative has to become real action—and that can be a big, and long, gap.”
Yes, who wins the presidential election matters. It matters differently to different people. But it doesn’t matter to the market overall. As a result, if you’ve got years of work ahead of you, it doesn’t matter to your retirement savings.
“The bottom line is that if you have a long-term time perspective, don’t worry about the influence of politics on the markets,” says Johnson. “And, if you don’t have a long-term perspective, you might want to try and get one.”
So, keep your politics in the voting booth where it belongs. Don’t let it seep into your 401(k) account.