The upcoming presidential election offers some very stark choices. Both sides have their reasons why the world will end if their candidate isn’t elected, so everyone is pretty nervous about the election results.
One of the biggest points of contention is the candidates’ contrasting ideas on the economy. It’s easy to paint an ugly picture of what the world and your retirement portfolio will look like if the wrong candidate becomes president.
We Can’t Predict the Future
But it’s important to take a step back and look at everything in context. So let’s take a deep breath and try to take an objective look at how the election could affect your portfolio.
No one can predict what’s going to happen in the future, but the markets are already pricing in their best estimates of how likely either candidate is to win and how bad that will be for the markets.
I don’t always say the nicest things about active managers, but they are (generally) pretty smart folks. There’s always someone constantly looking at anything and everything that might conceivably impact the economy or the markets. And by trading on that information, they price in all of the available information out there.
Market Play the Odds
One of the key pieces of information is how likely each candidate is to win. And luckily, there are all sorts of places that you can go and get different estimates – you can look at aggregated polling data, you can get futures trading prices based on who will win, straight up betting odds from pretty much anyone in Europe, and gobs of unsolicited advice and information from pretty much everywhere else.
This doesn’t mean that the odds will stay the same, but it does mean the changing odds will affect market prices.
But it’s not just the likelihood that one candidate will get elected that the markets care about. It’s also what they think will happen when one of them actually gets into office. This is a lot harder to assess, especially considering that candidates only keep campaign promises about two thirds of the time.
We don’t have our usual statistical models and quantitative data to rely on, but the markets will still do their best to guess the likely outcome. A lot of this depends on what Congress looks like, so that needs to be included in the estimates. Combine that with the potential results from the election, put it in the oven, and out pops the market’s best estimate of security prices.
The Markets are Faster Than You
The reason this makes predictions so difficult is that market prices are constantly incorporating new information – and doing so incredibly quickly. Future price movements are based on how the latest estimate or bit of campaign news differs from the market’s expectations of what will happen next.
Look at what the UK and European markets did in the aftermath of the Brexit vote. Prior to the election, most polling suggested the Remain campaign would win, so the market acted accordingly.
But they didn’t win, and the market was surprised, which is why we saw such a sharp drop in the markets. Then over the next few days, something surprising happened. The effects weren’t as bad as everyone expected, and the market started recovering—quickly.
Yes, the morning after the election was not a pretty one for the markets. But it only took four trading days for the market to recover everything that it had lost.
How Do You Protect Your Portfolio?
So what should do with your retirement portfolio?
Well, nothing actually. Unless you have some special insights into who will win and how that will affect the economy, there’s no way of knowing what the market will do going forward.
You’d just be trying to time the markets. And we know that timing the market doesn’t work. It doesn’t work with “traditional” market data, and it doesn’t work with polling data.
There are always reasons to worry that the markets are going to collapse, and this election seems to have more potential reasons than we’ve seen in a long time. But the markets keep chugging along, delivering good returns for disciplined long-term investors.
And this is the key – investing is a long-term activity. Trying to outguess the markets in the short term based on what you think will happen with the election isn’t going to help you.
The chance that the candidate you don’t like will destroy the economy (and the country) is already priced in, so getting out now means you’ve already taken a good chunk of the hit. Stay focused on your long-term retirement goals, and don’t overreact to the next crazy thing the candidates say.
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