Worried About the Election? Don’t Be (In Terms of Your Retirement Anyway)
Updated: Dec 24, 2020
As November approaches, you may have heard that a presidential election year can affect our investments. Yes, that is true, and over the last 23 election years, stocks have actually tended to perform positively a majority of the time. However, as we are all currently experiencing, this is an election cycle like no other.
COVID-19 continues to wreak havoc on our economy, our jobs, our education system, our hospitals, and even our mental health. There is a lot of uncertainty as to how much longer the pandemic will last, and as a result, we will continue to have many challenges ahead of us. The markets have responded with a lot of volatility and if you have been watching your retirement account lately, perhaps you have noticed some of these ups and downs? So, what should you do? The short answer is, probably nothing, but let’s explore this a bit further. The stock market is influenced by many factors. So, this really becomes a discussion about what we can and cannot control.
Factors we CANNOT control
Let’s start with the election. We are not talking about voting because you do have control over that, but in terms of the stock market and how it reacts in an election year. Along the same lines, we cannot control the economy, acts of war, pandemics, Federal Reserve decisions, or the weather. These are examples of changes in our environment that are inevitable and will undoubtedly affect the markets, for better or for worse. The good news is, these factors are cyclical, meaning they come and go. Some are shorter than others, but they are going to happen with or without your permission.
So, what does this mean for your portfolio? If you have stocks, it can be like riding a roller coaster. But, please understand that you cannot predict the market. This has been proven time and time again. Even if you correctly predicted when to get out, the chances that you get back in at the perfect time are basically zero. We do not know how the markets are going to react in the future, but we do know that the factors I mentioned earlier will always be at play. As much as you cannot control the weather, you cannot control movements in the stock market.
On the other hand, if you cannot sleep at night, you may be invested too aggressively. Regardless of your goals no matter how long-term, your tolerance for risk plays a large part in how you invest. You may also want to consider looking at your account less often. Perhaps you miss some short-term swings that would have otherwise caused you to make moves that would permanently wreck your long-term strategy. Also, if you have only a few years left until you need the money, you will want to consider re-evaluating your exposure to stocks.
Remember, there is a bigger picture here, regardless of what the news says or what your colleagues are saying. You may want to buy a house, retire, travel, fill-in-the-blank. Unless those goals or timeframes change, you are probably better off turning off the TV, saying “no thanks” to the talking heads, and taking inventory of the things you CAN control. Which leads us to…
Factors we CAN control
In terms of finances, your contribution amount, frequency, type of account, investments, and of course, your goals! Notice a theme, here? Where do you want to be and how are you going to get there? Goals should be SMART (Specific-Measurable-Actionable-Realistic-Timely). For example, “I want to retire at age 55 and make $80,000 per year” is much better than “I want to retire someday.” Ambiguity is a goal killer. You can easily calculate how much money should be saved and how it should be invested if you know the timeframe and amount. Keeping in mind, you will need to make assumptions about investment performance knowing of course, nothing is guaranteed. You may also want to consider setting up systematic contribution amounts so you buy into the market at both low and high points (no thinking involved here!), thus averaging out prices over the long term.
So, as you can see, there are many factors at play here, especially in an unprecedented year like 2020. Use your time and energy to set goals and build a plan to achieve them, regardless of what is happening around you. Focusing on things you cannot control is a waste of your mental energy. If you need some extra help, a financial planner can hold you accountable and keep you focused in the right areas.
And one quick final note: GET OUT AND VOTE! No matter your political preference, ensure your voice is heard. This is a factor you CAN control.