How do midterm elections impact your investment portfolio?
Electing the right perspective on elections
Election years always seem to raise the question, “Will my investments be affected?” And the answer may not be what you expect.
Despite the emotional uproar, campaign promises, and uncertainty that elections bring, investments historically have performed about the same in both election and nonelection years.
According to financial advisor Aviva Miller, “Vanguard research dating to 1860 finds no evidence of higher equity volatility in election years and no relationship between asset returns in election and nonelection years.”
Data show that the compounded annual return for a 60/40 portfolio (60% equities and 40% fixed income) during midterm election years was 8.1% compared with 8.2% in years with no midterm or presidential elections.*
But what about volatility? Our calculations have shown that the 100 days before and after a presidential election have presented low volatility data compared with the rest of the period and in nonelection years.
Annualized S&P 500 volatility
Source: Vanguard calculations of S&P 500 Index daily return volatility from January 1, 1964, to December 31, 2019, based on data from Thomson Reuters. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
As a result, the historical record suggests that both presidential and midterm elections are not traditionally predictors of volatility—nor abnormal market returns.
Crashing the party myth
Some may assume that one political party may have a better effect on market performance than the other, but evidence and historical data both show that this theory also falls flat.
The historical return differential between Republican and Democratic administrations is virtually nonexistent. The annual compound returns seen between parties is less than 1%.
60/40 portfolios' annual compound return
Source: Vanguard calculations based on data from Global Financial Data (GFD). 60% GFD US-100 Index and 40% GFD US Bond Index, as calculated by historical data provider Global Financial Data as of September 29, 2020. Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
So there‘s no need to make a change just because you‘re happy—or unhappy—with the election outcome. Instead, keep a focus on your goals and long-term plan.
How do I maneuver in a midterm market?
Making rash adjustments to your investments can get messy.
If you‘re worried about potential election-related volatility, remember that volatility works in two directions and that the best and worst trading days frequently happen in proximity to each other.** Additionally, accurately timing a market exit can be counterproductive if you don‘t also correctly time a return to the market.
In the end, long-term investing success does not rely on short-term market developments. Instead, it‘s more important to have a well-balanced, diversified plan that you hold for the long-term.
Markets move but you shouldn't
Can proposed campaign promises affect my investments?
During political campaigns, policy proposals can make us wonder what the future holds.
However, it‘s important to keep in mind that the path from proposal to law or from draft rule to final rule is often long and winding and may take months or even years to traverse. And some proposals fizzle out completely on the way.
A candidate's proposed policies are often part of a campaign strategy and are likely to differ once the candidate‘s in office—and those proposed policies may or may not pass. This is another reason not to prospectively alter a well-considered portfolio. When it comes to investment strategy, it‘s generally best to hit the mute button and stay the course.
So what should you do?
Focus on what you can control:
- Have clear, appropriate, attainable goals.
- Develop a suitable asset allocation using broadly diversified funds.
- Keep investing costs low.
- Maintain your perspective and long-term discipline.
For more information, refer to Vanguard‘s Principles for Investing Success.
Elections do matter, of course. They have great importance in upholding the U.S. tradition of a democratic, representative government. But elections are just one of many variables that affect the markets; economic growth, interest rates, inflation, productivity, innovation, and more also come into play. So don‘t let midterm elections shake up your strategy.
*Source: Vanguard calculations of a 60% equity, 40% fixed income portfolio are based on data from Global Financial Data, as of December 31, 2021. The equity portion of the portfolio is represented by the Global Financial Data USA Top 100 Total Return Index until 1986, then the S&P 100 Index thereafter. The bond portion of the portfolio is represented by the United States Bond Return Index. The performance data shown represent past performance. Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
**Source: Vanguard calculations based on data from Thomson Reuters and Morningstar using S&P 500 Price Index and S&P 500 total return, as of September 30, 2021.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and Certified Financial Planner™ in the U.S., which it awards to individuals who successfully complete CFP Board‘s initial and ongoing certification requirements.