The most frequent investment question 401(k) participants are asking these days is about the upcoming U.S. Presidential election and its impact on the financial markets. Fears of a prolonged vote count or a delayed decision, along with the potential significance of this election on future U.S. tax, healthcare, environmental policy, and now the vacancy on the U.S. Supreme Court, understandably places a lot of investors on edge. If that’s you, you’re not alone. According to JP Morgan, the bond futures market, the dominion of sophisticated institutional investors, is prepping for this election as one of the biggest risk events of the past decade.
2020 Election
History provides some interesting clues about the fate of an incumbent President. Interestingly, a simple stock market return calculation has routinely coincided with the winner since 1936. According to Capital Group, one of the world’s largest asset managers, if the S&P 500 Index is positive for the 90 days prior to the election (August 3 – November 3) the incumbent party has won 87% of the time. As of September 18, the S&P 500 is up 1.01% since August 3. Clearly, the modestly positive gains of today could easily go negative thus changing the inference as to the ultimate winner.
You’ve Been Here Before
This isn’t the first time, and certainly not the last, you’ll be faced with the age-old dilemma about what to do when you’re staring down the barrel of an event that profoundly influences your retirement savings. Your contemplation is understandable. Your mettle as an investor has been battle-tested as the S&P 500 fell thirty-five percent in less than a month this past March, and a nineteen percent decline was endured during the fourth quarter of 2018.
Think Fundamentals
When investing for your retirement, your goal is to generate the highest rate of return commensurate with the time horizon for the investment and your willingness to accept risk. If your time horizon is short, say less than 5-years, you should not take as much risk as a person with a 10 year horizon, and your expectations about upside return need to be reduced.
How do you know if you have taken on too much risk? Candidly, if you find yourself routinely getting angry at losses, losing sleep at night, or looking back at past decisions where you sold at market lows and missed out on the upside in a market rebound, it’s time to rethink your strategy. Your mind, sleep patterns, and pocket book are more likely than not to benefit from a disciplined approach.
Benefits of Investment Discipline
A core discipline exercised by successful investors is portfolio rebalancing. Rebalancing is the simple act of buying more of what went down (stocks) by selling what has been outperforming (bonds). In doing so, you bring your total portfolio back into its preferred long-term allocation between stocks and bonds. This discipline invests new money into the stock market at reduced prices and accelerates your recovery when prices rebound. For example, when the market surged both in early 2019 and the second quarter of 2020, a rebalanced portfolio enjoyed the ride higher.
Consider Using Professional Management
For most 401(k) investors though, watching an investment account go up and down and taking action when the time is right, is not something they feel called to do. Therefore, your plan’s target date fund or balanced fund alternative may be the better solution. By investing in these types of funds, you turn over the investment decisions to a professional investment manager. With target date funds, you not only have the pros deciding when to take more or less market risk because of prevailing economic and political conditions, but also deciding when to take less risk because of your proximity to retirement.
Successful 401(k) investing is all about having a plan and sticking to it. We speak to many retirement plan participants, and it’s hard to convince them to look long-term regardless of current events. The power of human nature to flee from perceived danger rears itself time and again leading some to decisions they may later regret. Our best advice is to pick a strategy, and stick with it. If you can’t do that, hand the reigns over to the pros, and let them make the calls for you.
This column was also featured in the Star Tribune. The material provided is for informational purposes only. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Francis Investment Counsel does not offer personal tax or legal advice.