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Should I Change My Investment Plan Ahead Of The Election?

You may be hearing “Should I Change My Investment Plan Ahead of The Election?” Chief Investment Officer Jared Kizer talks election year markets and what you may be able to expect for your clients’ investment plans in the latest Ask Buckingham video. Watch now!

Jared Kizer talks election year markets and what you may be able to expect for your investment plans.

Video Transcript:

Tim Maurer:

Hello, Tim Maurer back with another episode of Ask Buckingham. A video podcast designed to bring clarity in the midst of confusion by connecting your great personal finance questions with straightforward answers from industry thought leaders. Today’s question will be answered by Jared Kizer, chief investment officer of Buckingham Wealth Partners. And Jared, we’ve got this thing coming up in the not too distant future that seems to be getting a decent amount of attention, called the presidential election. I am curious what your thoughts are on what you can expect or what we can expect from the market in the midst of such a momentous occasion.

Jared Kizer:

Love the understatement, for sure. Yeah, a tad bit of attention is going to go into this one, that’s for sure. So a few things come to mind. I do think it’s fair to expect that we’re going to see a good bit of volatility. In the markets, you’re certainly seeing folks are paying attention to the financial side of reporting. There’s certainly some indications that the overall markets are gearing up for volatility leading into and through the election. So I certainly think relative to past elections, past events, I think that’s something that’s wise to prepare for because that’s certainly what the markets are expecting.

Jared Kizer:

Now, what that doesn’t mean, importantly, as we all know that it’s impossible to predict what direction that’s going to go. So when you think about volatility being higher than normal volatility could of course be both directions on either the downside or the upside. So that’s, I think the important thing from a planning perspective, as I would say, kind of prepare for a good bit of volatility in markets broadly going into the election and possibly through. Depending upon what the election ends up looking like, but of course, being able to predict which direction that will end up going in terms of the volatility. I would say, is impossible to do, as we have many, many instances from recent memory of whether it’s the 2016 election, what happened in markets after that relative to what was expected. Or other events like even more broadly in investing, if predictions of rates are going to do A, B, C, or D here for a decade. Plus we know those directional predictions are very difficult and I think this time is no different on that front.

Tim Maurer:

For sure. Well, and we’re all prone to this concept known as recency bias, right? Whatever is most recent, whatever is current, it tends to captivate our attention. We have a tendency to think, “Well, this is the biggest or the worst or the craziest that has ever happened.” But of course, as you just mentioned, even a couple of additional elections, the stakes were pretty high there too, and things were pretty crazy there too. So can you give us an idea from a historical perspective? What do we generally see from this event known as the presidential election?

Jared Kizer:

Yeah, the historical data is very clear on that front. So we’ve got … One of the good things about the US market is we’ve got lots of history to look at, like literally going back, I saw some recent reporting on this exact question, going back prior to the Civil War and forward. So we’ve got a lot of presidential elections to look at. How did markets do in those years versus other years? And I don’t know what folks would guess here, but the data is very clear. That generally you see returns in election years have been virtually identical to all other years. And surprisingly, even though this election may be a little bit different, you’ve seen volatility in those years has been about the same as other as well.

Jared Kizer:

So that tells you that certainly a lot of these elections, not just this one. Again, if we’re literally talking about prior to the Civil War, we certainly know there were a lot of presidential elections from there forward that got a lot of attention and could have swung markets one way or the other. But in general, you definitely don’t see that there’s a huge impact, when you look at the broad span of history for the US markets on either again, the return or kind of volatility side of the equation.

Tim Maurer:

And isn’t that amazing when we look at any of these major events that we go through, whether we’re talking about a pandemic, whether we’re talking about a crisis, whether we’re talking about a presidential election. It’s just interesting to see the way the market kind of moderates all that stuff with the benefit of historical context, but Jared, what does that suggest for investors today? You’re certainly hearing plenty of people saying, “Well, if so-and-so wins, I think the market is going to go up like crazy or if so-and-so wins, the market’s going to go down like crazy.” And perhaps not ironically, as many of those opinions on both sides, regardless of where you stand from a political perspective. It’s hard to detach ourselves from that particular hope or opinion or preference, whatever it might be. So what do you suggest investors do as it relates to the presidential election that’s upcoming?

Jared Kizer:

Yeah. So I think, as with any of it, you certainly want to make sure you’re comfortable with the plan that you’ve got in place. Again, from a long-term perspective and the big, big challenge, you hit the nail on the head. There’s certainly that belief across clients on both sides of the political spectrum, at least some folks that, “Well, if it goes this way, I think this is guaranteed to happen. Or if it goes this direction, I think that’s guaranteed to happen.” And those types of beliefs, or at least acting on those are very, very dangerous thingd to do in the context of investing. Because it’s just very, very difficult, even though you can believe, and I understand why folks might feel a certain way or this is likely to happen. Markets are so dynamic. There’s so many things that impact the markets that it’s just not wise to act on those.

Jared Kizer:

It’s better to think about going back to our last question. Well, what do we know about what markets tend to do over long periods of time? What do the bad periods tend to look like? What do good periods tend to look like? And build all that knowledge into the plan in terms of how much risk you’re taking relative to the goals that you’re needing to achieve and resist the temptation to react to what you think markets are going to do. And then the other thing that always comes to mind here on this particular topic is, whatever transpires in November, a very, very safe bet is that markets will respond pretty rapidly.

Jared Kizer:

So it’s unlikely to be the type of thing that you can kind of see how it plays out and make big adjustments there. Markets are swift and they’ll likely react pretty significantly in whatever direction they go. And then again, I’ll come back to the complexity point. We’ve got the presidential election, we’ve got Senate and House implications. We’re not the only country on the face of the universe. And there are lots of other things out there that can [inaudible 00:07:06] of the planet. So lots of other things that can impact, what can happen in November, even outside of the US. So you put all that together and definitely continue to be in the camp of, “Hey, make sure your plan is robust from a long-term perspective.” And you’ve thought through what long-term planning looks like and try best you can to resist the temptation to make big changes to the portfolio, either leading into or after the results of the election, whatever they will end up being.

Tim Maurer:

Yeah. Jared, I’m currently reading Morgan Housel’s newest book, The Psychology of Money. And right now, literally just this morning, I read a chapter that is specifically discussing our capacity for expressing our emotion within the context of investing. And he refers to the rational concept. And of course, this is what historical economics was based on. This whole notion that we’re always rational and the big conclusion to come from that is that we’re not entirely rational or entirely irrational. We’re just human. And so his recommendation is to be at the very least reasonable with your investment. So I’m curious if someone is coming to you right now. An investors says, “Jared look, I know what the history says. I appreciate your advice, but I am gripped with fear.” What might be a reasonable step that person could take in terms of calibrating their portfolio while not necessarily taking a completely in or out approach to it?

Jared Kizer:

Yeah. So I think there are a few things you could do that are on the margin. I think fit into that reasonable camp. Like one situation that could come to mind, somebody that is contemplating, “Well, what do I do with a big potential investment into a plan that I would otherwise, be fully comfortable implementing that plan now?” Otherwise, and in a more normal set of circumstances. So there, it wouldn’t be normally what I recommend. Normally we would recommend implementing immediately, but there I think a reasonable test is to develop, hey, a dollar cost averaging plan could be perfectly reasonable. There again, I want to be clear more times than not that leads to worse outcomes than better, but I think it’s marginal enough that I think, if that makes somebody comfortable. I think that certainly fits the reasonable test there.

Jared Kizer:

I think the other thing to … Even though I wouldn’t encourage big shifts in allocation, I think the other thing to keep in mind is very generally, when I think about what’s reasonable for a prototypical investor, that’s close to retirement or heading into retirement. I think generally there, if you can, you want to have a relatively modest equity allocation overall, and that’s not just, again, related to what’s coming up in November. I think that’s just a good reasonable principle to try to build a portfolio toward particularly for those folks that are heading into retirement. That’s just a good kind of a default planning mindset from an investment strategy perspective. Since, we know equity, stocks can be really volatile. So those are a couple things that come to mind there. I know we could come up with other examples, but I think those are good. Couple of cases that fit that reasonable in this test.

Tim Maurer:

Absolutely. Well, thank you. We’re all different. Right, Jared? And we’re going to respond to stimuli differently. I think that regardless of where you are at your phase in life, regardless of the events that we’re going through in a particular moment, you need to have a portfolio that you can actually sleep at night with. And so calibrating your portfolio to navigate those challenges always makes sense. Well, thank you so much, Jared. I always get a dose of rationale from you, if my emotions are starting to lead. So I appreciate your insight and your expertise. And thank you for tuning into this episode of Ask Buckingham.

Tim Maurer:

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