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How to Deal With the 2016 Presidential Election and Your Portfolio

It’s tempting to position your portfolio to take advantage of new policies being proposed by a new President before they have been elected or shortly after their election. Evidence suggests it’s better to wait instead of trying to time the market.

Here are a few strategies to keep in mind over the next few months:

  • Expect volatility as the election draws near. The markets do not like it when there are looming questions about the future direction of the country. Most likely this volatility is short term and will clear up as investors digest the implications of one president over the other. This will be especially true if the candidates target a particular industry (such as health care or defense).
  • Remember you are a long-term investor. Much of the noise and headlines will not have a long term impact on your investment future.
  • Stay the course with your investment strategy. The candidates, their respective parties, think-tanks, experts, pundits and the media will try very hard to rattle your cage to sway your opinion and to get your vote. They will use fear tactics or they will paint rosy pictures of the future. And unfortunately, many investors will make poor investment choices prior to the election. They will move to cash if they are afraid or they will move into an asset class they believe will soar if their candidate wins.
  • Any significant policy changes will take months to develop and potential a year to roll out.

Why We Shouldn’t Mix Politics and Investing?

We can’t help but hear about the election on the news. And when it comes to each candidates economic policies, we are quick to imagine how it will affect our investments. We assume that Trump’s determination to bring jobs back to the US could boost US stock prices and perhaps hurt foreign stock prices. We think that because Clinton has talked about reform on Wall Street, that financial companies would be hurt if she were elected President.

But the connection isn’t as clear as the media makes it out to be. Both politics and the markets are very complex systems with many, many moving parts. We are quick to arrive at various conclusions as to cause and effect. Or quick to identify patterns. In reality, it’s nearly impossible to predict how presidential policies will affect the stock market. We may think we see a pattern or understand cause and effect, but there could be more factors contributing to the expected outcome

All of these thoughts can be connected to a set of common investing errors that are discussed in a growing field of behavioral economics. The following article does a great job of capturing some of these elements

Why Your Instincts Are Hurting Your Investment Returns?

Imagine your reading this post in a busy coffee shop. All of a sudden you look up and see people running out of the shop. What do you do first? Chances are, you get up and follow everyone else. You might not even know what’s going on at first. Are you getting away from a dangerous situation, such as a fire in the coffee shop? Or is everyone running toward something or someone, such as a celebrity?

This is an instinctual reaction. There is perceived safety in numbers. It goes back to some of the earliest known ancestors and can be seen in many animal species today.

If we dig into this a little deeper, it’s actually a mental short-cut (technically called a “heuristic”) . In the coffee shop example, you didn’t have time to take stock of the situation to understand what’s occurring. Instead, you relied on actions of others and assumed they were making the right decision. It worked well for our ancestors and it continues to work well for us today. Except….

Except for when it comes to investing. Assume you’re watching the news and all everyone is talking about how XVZ stock is doing “great” and “everyone” is buying it. Unfortunately, the average investor will want to get in on it. They follow the hearding behavior of others and buy XYZ simply because “everyone” else is doing it.

That’s precisely the wrong time to be buying a stock, yet it’s so difficult to overcome this instinctual response. This is even more difficult when stock prices are declining and investors hear about so many people selling out of their investments. The instinctual response to follow the crowd kicks in. The investor will feel better and maybe safer knowing they are doing what everyone else is doing. But evidence clearly shows it to be a poor decision to follow the heard of other investors.

This is an example of our instincts working against us. Instead of reacting to the news, take a minute to take stock of the situation, assess what is going on, consult with your financial advisor, and understand how your decision to buy or sell an investment will affect your likelihood of reaching your financial goal.

Comparing Chess To The Stock Market And The Election

The average chess player can see 1-3 moves ahead in a game of chess. But a grandmaster chess player can see 10 moves ahead and sometimes up to 20. More interestingly, when they look at the board they see shapes and patterns not number of moves.

Playing chess is like connecting the dots between the stock market and the election. The media, think tanks, special interest groups and the talking heads are focused on the implications of the election on the stock market and the economy. If Trump is elected, the pundits are predicting one outcome and comparing it to the hypothetical outcome if Clinton wins.

They try to paint a very clear, logical picture of the how one policy will help America and the economy. But the oversimplification does not properly consider the hundreds or thousands of variables that affect the economy or stock market. While these experts try to account for as many variables as possible, it’s simply impossible for them to do so with any sense of reliability or accuracy.

These supposed experts see one set of moves and believe that’s how it will play out. If they were playing chess, they would be an amateur chess player who could only see the logical progression of their agenda if their opponent performed exactly as expected. And when their opponent did something unexpected (which usually happens), their plan would be thrown out the window.

When it comes to listening to these experts talk about the effects of the stock market as a result of the election, keep in mind that there are thousands of variables that will affect the stock market. In fact, there is a lot of research that suggests the election has no effect on the stock market in the long term.

The Election, Your Investments and Why The Experts Get It Wrong

It didn’t take long for someone to make a connection between Clinton’s health scare on Sunday and the stock market.

How Hillary Clinton’s Health Scare Threatens The Markets

The premise is that the markets have always expected Clinton to win the presidency, but with a possible health issue it could hurt her chances.  It leaves the door open for Trump to win and the markets will become volatile.

The article goes on to suggest that certain industries and asset classes will do better (or worse) with Trump. For example, Trump has suggested the creation of a wall along the border of Mexico which will require construction crews and new infrastructure.  The journalists suggests that investors reevaluate their portfolio now.

On the surface, the story seems reasonable:  There is a new problem (Clinton may not sail into the White House), there is an alternative result (Trump wins the election), and there are implications of that result (The stock market could be affected).  The logic seems reasonable – It presents a clear and simple narrative.

In reality, the logic is broken.  It oversimplifies all of the concepts in politics and economics.  It does not take into consideration of all the nuances and complexities that exist in our world. Drawing a connection between Clinton’s health and your investments is a real stretch.

So why are articles like this so common? It deals in part with our desire to understand implications.  We think of issues in terms of “cause and effect” just as the article illustrates.  Our brains are wired to think in these terms because it creates a simple narrative for us to remember. But the sort of analysis needed requires thinking in terms of correlation and probabilities.  These are complicated forms of analysis and their results are not specific and concreate in a way that the average investor would find useful. It’s completely contrary to the “cause and effect” approach.

 

Why Your Instincts Are Hurting Your Investment Returns?

Imagine you’re reading this post in a busy coffee shop.  All of a sudden you look up and see people running out of the shop.  What do you do first? Chances are, you get up and follow everyone else.  You might not even know what’s going on at first.  Are you getting away from a dangerous situation, such as a fire in the coffee shop?  Or is everyone running toward something or someone, such as a celebrity?

This is an instinctual reaction.  There is a perception of safety in numbers.  It goes back to some of our earliest known ancestors and can be seen in many animal species today.

If we dig into this a little deeper, it’s actually a mental short-cut (technically called a “heuristic”) .  In the coffee shop example, you didn’t have time to take stock of the situation to understand what’s occurring.  Instead, you relied on actions of others and assumed they were making the right decision.  It worked well for our ancestors and it continues to work well for us today.  Except….

Except for when it comes to investing.  Assume you’re watching the news and all everyone is talking about is how XVZ stock is doing great and how everyone is buying it.  Unfortunately, the average investor will want to get in on it, too.  They follow the hearding behavior of others and buy XYZ simply because everyone else is doing it.

That’s precisely the wrong time to be buying a stock, yet it’s so difficult to overcome this instinctual response.  This is even more difficult when stock prices are declining and investors hear about so many people selling out of their investments.  The instinctual response to follow the crowd kicks in.  The investor thinks they will feel better and maybe safer knowing they are doing what everyone else is doing.  But evidence clearly shows it to be a poor decision to follow the heard of other investors.

This is an example of our instincts working against us. Instead of reacting to the news, take a minute to take stock of the situation, assess what is going on, consult with your financial advisor, and understand how your decision to buy or sell an investment will affect your likelihood of reaching your financial goal.