How Will The Election Affect Your Investments?
We have just completed a truly historic election. As a citizen, you'll want to follow how President-elect Obama and the new Congress address issues of importance to you. But as an investor, you might be particularly interested in how the election results can affect your investments, especially given the recent Wall Street turmoil. Based on what happened on November 4, should you make any changes to your portfolio?
To answer that question, you may find it useful to review the history of the financial markets under different political scenarios, according to Ned Davis Research:
Stock Market: Since 1901, the Dow Jones Industrial Average has shown an average annualized return of about 12 percent under Democratic presidents, compared to about 8 percent under Republicans. When Democrats have controlled Congress, the Dow's average annualized return has been about 11 percent, compared to about 8 percent when the Republicans were in control.
Bond Market: Since 1925, longterm government bonds have retuned more than 7 percent under Republican presidents, compared to about 3.4 percent under Democrats. When Republicans have controlled Congress, the bond market also fared better than when Democrats were in charge, though the difference isn't as pronounced as in the comparison between presidents of different parties.
But while it's interesting to study the past, it's not necessarily instructive about the future. It's true that by changing our tax laws, government spending and industry regulations, any given president and Congress can affect economic growth, jobs, interest rates and inflation - and all these factors, inturn, can affect the financial markets. Still, it's impossible to predict just how these forces will influence the investment world. Political candidates often make promises that never turn into reality, and even if they do, they can have unintended consequences.
Ultimately, the free-market forces of our capitalistic system are likely more powerful than political forces in determining the ultimate performance of investments. As a country, we have experienced many political changes and upheaval, but, over time, our economy has always proven resilient enough to provide opportunities for those people with the faith to invest for the future.
Here's the bottom line: You don't need to change your investment style or revamp your portfolio in response to the election results. Of course, that doesn't mean you should be oblivious to new policies and their potential impact on your investments. In act, it's a good idea to review your portfolio at least once a year with your financial advisor, who can recommend any changes that might be beneficial.When you cast your ballot, you supported the candidates who best advocate your concerns on a range of issues. From year to year, these issues may change. But when it comes to your portfolio, it's always a good idea to "vote" for time-tested techniques, such as buying quality stocks and bonds, holding them for the long term and building an investment mix based on your goals and risk tolerance.