Weekend Reading: Investing Before The U.S. Election Edition

Many investors tend to be nervous about their portfolio and the direction of the stock market during an election year. You may even think it’s wise to hold off on investing a lump sum of cash until after the election is over. This behaviour comes from the belief that markets are more volatile leading up to and immediately following a U.S. election. 

An election brings with it the potential for a new presidential party and new ideas for growing the economy. Markets hate uncertainty*, so it’s intuitive to want to wait until after the election to see how the market prices in these new (or old) ideas.

But is there any evidence to suggest that markets are actually more volatile during an election year? And, furthermore, is there any relationship between the stock market and which presidential party is in power? 

PWL Capital’s Ben Felix looked at the 12 month returns in November of election years and non-election years from 1926 to 2019. In election years, returns were 10.6% for the average 12 month period, versus 11.9% for all 12 month periods in which there was no election.

So, even though the returns were slightly lower in election years, there was no meaningful relationship between stock market returns and election years. Seven of the 23 election year 12 month periods had negative returns. Those numbers align with historical data that shows market returns tend to be up two-thirds of the time.

Does it matter whether the election is won by a Democrat or a Republican? Again, intuitively, we’d expect more favourable stock market returns from the business friendly Republican party. But the data shows a different result.

Dimensional Funds examined market and economic data for nearly 100 years of U.S. presidential terms and showed a consistent upward march for U.S. equities regardless of the administration in place. 

Click to see the interactive chart

More surprisingly, stock returns (on average) were much higher when Democrats were in power. The excess return of the U.S. stock market over three-month T-bills (equity risk premium) was on average 9% per year higher under Democrats than it was under Republicans.

What should you do with this information? Nothing, assuming you already have a globally diversified, risk appropriate portfolio. Keep doing what you’re doing. But, if you’ve been sitting on cash waiting until after the U.S. election results, I’d suggest you follow the research on how to invest a lump sum of money. The evidence shows that it’s more favourable to invest a lump sum immediately rather than dollar cost averaging over time or waiting until markets “settle down”.

If you’re nervous about investing before the U.S. election it may be wiser to reconsider your risk profile and adjust your asset mix to include more bonds. 

*Finally, let’s look at the idea of market uncertainty and waiting to invest until markets “settle down”. Markets price in future expected returns based on the best available information. But the future is unknowable. Stock prices are constantly adjusting as investors price-in new information.

That means markets can never be “certain” about the future. The best we can do as investors is to build a globally diversified and risk appropriate portfolio and stay invested for the long-term. Ignore events (like the U.S. election) that seem like they’d have an impact on stock returns but in reality show no clear relationship.

This Week’s Recap:

In my latest edition of the Money Bag I looked at Couch Potato returns, first investment ideas, early CPP, and more.

Earlier this week I shared some ideas on how to think about retirement planning.

Next week I’ll let you know about an opportunity to invest in the green economy and earn a fixed return. I’ll also share which credit card I’ve been using for the past seven months to maximize the rewards on my spending.

Fred Vettese has completely revamped his excellent book, Retirement Income For Life. I have two copies of this second edition – one to review, and one to give away on the blog. Stay tuned for that in a future post.

Promo Of The Week:

A reminder that the Canadian Financial Summit goes live next week from October 14 – 17.

I’m joining speakers such as Kevin McCarthy (creator of the TFSA), Rob Carrick, Ellen Roseman, Kristy Shen & Bryce Leung (the dynamic early retirement duo) and more.

[see the full speaker list to look for your favourites]

You can catch me on October 16th speaking about how to identify major gaps in your financial plan. In addition to my session, you can watch these great sessions throughout the week on:

• How to retire early and on your own terms
• How to invest better, easier, and more efficiently
• How to earn more money by creatively advertising innovative side gigs
• How to see through financial jargon meant to confuse you
• How to check your “retirement readiness”
• How to avoid crippling fees and terrible advice
• How to legally avoid Canadian taxation when you move for work or retirement
• How to use Financial Technology (FinTech) to save major cash
• How to drawdown your nest egg in retirement & what a safe withdrawal rate is

The Summit will kick off with a live webinar on October 14th and is absolutely free to view for that weekend.

If you want to check out the videos after their free window has passed (and get access to a whole smorgasbord of bonus resources and video sessions) then you’ll want to sign-up for the All Access Pass. Don’t miss out on the Early Bird Pricing, as the price jumps as the Summit begins.

How do you sign up?

Just click here to claim your free tickets and browse this year’s fantastic speaker line-up.

I hope to see you there!

Weekend Reading:

Our friends at Credit Card Genius share the best credit card offers, sign-up bonuses, and deals for the month of October.

Dale from Cut The Crap Investing presents a 7-ETF portfolio for retirees.

Speaking of suitable ETFs for retirement, Dan Bortolotti continues his excellent series on Vanguard’s VRIF with a look at whether its 4% distribution is sustainable. The post also contains a great quote about unsustainable payouts:

“Monthly income funds with such unsustainable payouts are a rarer these days, but they still exist. Perhaps the most egregious example is the Canoe EIT Income Fund (EIT.UN), which pays a monthly distribution of $0.10. That’s a pornographic yield of over 13%, which explains how it has attracted $1.1 billion in assets.”

John Stapleton is an expert on planning for retirement on a low income. He has a workshop scheduled on this topic that takes place live and online on October 21.

Blogger Nick Maggiulli digs into the data to explain why today’s stock market is not a repeat of the dot-com bubble.

Sequence risk refers to the possibility of running out of money in retirement because of the order in which the markets’ best and worst years occur. One researcher concludes that retirees should be informed, but not obsess, about sequence risk.

The latest video from PWL Capital’s Justin Bender explores the subject of investing in gold. Is it a safe haven, portfolio diversifier, return enhancer, and inflation hedge?

My Own Advisor Mark Seed takes an extremely thorough look at the pros and cons of taking the commuted value of a pension. I did a similar calculation when it came to my own pension decision and ended up taking the commuted value.

The Irrelevant Investor Michael Batnick answers a podcast listener question about when to use a financial advisor. The answer is a must-read, and includes this gem:

“Above everything else, an advisor can answer the only question that really matters: Am I going to be okay?”

Why Humble Dollar blogger Jonathan Clements wants to pay it forward as he thinks about his remaining years in retirement.

Thinking of selling your home? Global’s Erica Alini explains how you can save thousands with the right type of mortgage.

RV sales increased sharply during the pandemic as locked-down travellers sought more domestic trips. Andrew Hallam looks at the best time to buy an RV.

Finally, freelancer Max Fawcett explores the controversial modern monetary theory (MMT) and explains why Canada won’t go broke.

Have a great Thanksgiving weekend, everyone!