With the election just months away, investors are increasingly focused on how the outcome might impact their investments. While political discourse in the U.S. feels especially contentious these days, election fear among investors is nothing new. Election cycles are commonly accompanied by a heightened level of anxiety.

For many people, politics can elicit strong emotions. Inevitably, some investors will wonder if they should liquidate their portfolio to mitigate the risk of a victory by the opposing candidate. The fact that this pattern repeats over each election cycle would suggest this behavior has been rewarded historically. The data strongly suggests otherwise. When it comes to investing, emotion often leads to poor choices and can be detrimental to portfolio performance.

To demonstrate, consider the chart below. It illustrates the growth of $1,000 invested in the large-cap U.S. stocks of the S&P 500 since President Eisenhower was inaugurated (1953). The three columns demonstrate what happened to the initial investment under the following three scenarios:

1. The investor was fully invested under Democratic Presidents but liquidated when Republicans took control. (Invested for 32 of the 71 years)
2. The investor was fully invested under Republican Presidents but liquidated when Democrats took control. (Invested for 40 of the 71 years)
3. The investor remained fully invested for the entire period. (Invested for 71 of the 71 years)

Impact of Market Timing Based on The Party in Office

Source: Morningstar Direct. Stock returns represented by the S&P 500 TR Index using monthly data from 2/1/1953 to 8/31/2024. Presidential terms were assumed to begin on the first of the month following the new President being sworn in and continue to the last day of the month that the President held office.

The results are shocking. The $1,000 initial investment gained significantly under both Democratic and Republican administrations, growing 65x and 29x, respectively. Despite these impressive gains, the growth for the parties individually paled in comparison to an investment held for the full period. How can this be?

Answer: the power of compounding.

As you lengthen the amount of time returns can compound, the impact/benefit increases at an accelerating (exponential) rate. This benefit of time is very apparent in the above chart. It is the sole force behind the massive amount of ending wealth for the full period scenario relative to being invested only when one political party is in power.

As the saying goes… it’s all about ‘time in the market,’ not ‘timing the market.’  

Over the next few months, the election is going to dominate the headlines. There will be an endless supply of people trying to predict the future and how to position for it. This is all noise. The best course of action is for investors to separate their politics from their portfolio and focus on their long-term plan.

Don’t bet on a Republican win to achieve your financial goals, and don’t bet on the Democrats either. Bet on the millions of small business owners and corporate leaders (including many of our readers) to adapt to any environment and continue to grow. Your portfolio is invested in them, not a political party. Ultimately, the longer you stay invested, the more time you give the power of compounding to work its magic.

Source: MarketWatch

IMPORTANT DISCLOSURE INFORMATION