One question that always seems to come up in investing circles every four years is the relationship between an election year and the stock market.
Regardless of who is running, election years can have a big impact on the market's performance - and given that this year's election is taking place in the midst of a global pandemic, this is all the more true.
Below, we'll cover everything you need to know about how to invest during election years in order to help you navigate these tricky times.
Historical Relationships Between Election Years and the Stock Market
The best way to better understand the relationship between presidential election years and the stock market is to look at how the market has performed in the past during an election cycle.
Here are three key takeaways that can be drawn from the market's past performance during election years:
1) The Market Tends to Perform Well During an Election
While this may come as somewhat of a surprise, the stock market actually tends to perform quite well during an election year, with the market having been positive overall in 19 of the past 23 election years.
Of course, given the effects of the COVID-19 pandemic, 2020 has been a tough year for the market and we are not likely to see the same results as we saw with the last election year and the stock market.
2) The Few Months Before Tend to Have Lots of Volatility
While the market does tend to perform well during an election year, it also tends to be a lot more volatile in the months leading up to the election.
There are few things Rule #1 Investors dislikes more than uncertainty, and the months leading up to a presidential election certainly create plenty of uncertainty. With that being said, it's a good idea to learn how to weather volatility if you plan to invest during an election year.
3) The Year After the Market Tends to Stagnate
Historically, the year following a presidential election tends to see a stagnation in stock market growth regardless of which party is in power. In fact, five of the last thirteen presidents saw negative market growth in their first year in office.
Given this trend of poor performance during the year following an election combined with all of the other challenges that the market faces in 2020, it is a good idea to prepare for the recession to continue in the year following this upcoming election.
Does it Matter Who Wins When It Comes to Investing?
What happens to the stock market if Trump wins? What if Biden wins?
While these questions are on every investor's lips, the unfortunate reality is that there is no clear cut answer to them.
Since new presidents tend to come in and shake things up, in the short term, the market does tend to perform a little better when the incumbent wins, at least during the early stages of the new term.
However, this is not always, the case, and it's certainly not possible to say right now how the market will react to President Trump vs President Biden. Plus, we Rule #1 Investors, we're concerned with short term changes in the market; we're looking at long-term performance knowing that eventually the market always goes back up.
While it is difficult to say how the winner of the 2020 election will impact the market, it's not all that difficult to predict the tumultuous times we are heading for regardless of who wins and loses.
Right now, both myself and Warren Buffet are largely choosing to sit on cash due to what we both see as a strong likelihood of a major drop in the market following the election.
Tips for Investing During an Election Year
Election years are just one of the many complicating factors you must navigate as a Rule #1 investor. To help you keep your portfolio as strong as possible during this election cycle, here are a few election-year investing tips.
1) Get Into Cash
Given the volatility and subsequent stagnation that election years tend to bring, an election year is a good time to get into cash and wait for the dust to settle. In 2020, with all of the continuing challenges that the COVID-19 pandemic has created, this is especially good advice.
2) Build a Watchlist
While you are sitting on cash waiting on things to shake out is a great time to start building a watchlist of companies you would like to purchase if the price is right.
In many cases, the volatility than election year causes can often times create some excellent buying opportunities.
3) Stay Rational
Every election year, there are bound to be pundits on both sides of the aisle declaring that the sky will fall and the world will end if the other party wins.
During these times, it is essential to stay rational and not buy into the hysteria. After all, this country has undergone dozens of changes of power over the decades, and the market has continued to steadily grow all the while.
Learn How to Invest During an Election Year
If you would like to learn more about how to effectively navigate this tumultuous election year and keep your investments safe, it's not too late to sign up for my upcoming 3-Day Virtual Investing Workshop. In this informative workshop, you will learn exclusive tips and strategies that you can use to protect your investments and maximize your returns throughout 2020 and the years that follow.