It’s no surprise that this year’s U.S. presidential race has become a subject of conversation around the globe. The frequency, and intensity, of these conversations will probably only increase as the November 8 election date nears.
We are by no means endorsing that you ignore what is going on in the world around you. Politics and politicians regularly and directly affect many aspects of our lives and our pocketbooks. But as you think through this year’s raucous race, remember this:
The more heated the politics, the more important it is to establish and maintain a well-planned, long-term approach to managing your financial life.
So go ahead and talk politics all you please – and if you are an American, be sure to vote. But when it comes to your financial life, it’s best to ignore any intense emotions, and the dire predictions that spring from them, as dangerous distractions that can be harmful to financial health.
Focus on Planning Not Predicting
A well designed financial plan should eliminate the need to predict with precision what the market will do as a result of whoever wins in November. This is a good thing, because contrary to what you read and hear on a daily basis, history has shown that no one can do this effectively. Yet, that is exactly what countless people do – they rely on market predictions to make their financial and investment decisions.
Rather than relying on predictions, we should manage our financial lives with a strategy – a plan of action that will achieve a major aim. Once you have a good financial strategy in place, it is important to ask periodically if you are substituting impulse for strategy. It’s very natural to feel fear, and the accompanying impulse to flight, in down markets. However, it’s not advisable to act on impulse and give in to that fear. That’s a fundamental distinction that we all need to make.
Develop a Goals-Based Financial Strategy
You should follow a goals‐based financial strategy to help keep you on track over the long term. What would such a financial strategy look like?
First, an effective financial strategy should be carefully thought out. The strategy should attempt to consider all the implications of decisions before any market crises occur. At its core, it should not require you to do the impossible; that is, predict the timing of future market fluctuations with precision. However, it must acknowledge that future market fluctuations are normal and expected.
Second, an effective financial strategy should take into account the long term implications of your investment decisions. Take stock ownership, for example. Generally, you own stocks because you need the returns they have historically provided to achieve your long‐term financial goals.
If someone, acting on impulse, flees stocks now because of the upcoming election, eventually they will need to get back in. And to do this successfully, they will need to be right twice. They have to get out at the right time and then get back in at the right time. If mountains of behavioral financial research are any indication, the odds of anyone pulling this off are (to put it mildly) not good. Unfortunately, no bell rings when the market has hit bottom and no buzzer sounds to indicate the beginning of a prolonged bull market.
Here are thoughts to bear in mind:
- Regardless of the outcome of the election, there’s no telling whether the markets will move up, down, or stay the same in response. By the time they do make their move, the good/bad news will already be priced in, too late to profit from or avoid.
- In the long run, the market has moved more upward, more often than it moves downward, and it often does so dramatically and when you least expect it.
- Moving to cash would generate trading costs and potentially enormous tax bills. Worse, it would run contrary to having a sensible plan, optimized to capture the market’s unpredictable returns when they occur, while minimizing the costs and manageable risks involved.
Knowing that uncertainty is the only certainty, it is important to manage your financial life with a plan, and not with predictions. While predictions come and go, a well‐designed, principles‐based financial plan will help you prepare for, and navigate through, an always uncertain future.
In this or any election, it is critical to recognize the folly of trying to tie your investment hopes, dreams, fears, and trading decisions to one or another candidate. Politics matter – a lot – but not when it comes to second-guessing a well-planned financial strategy.