This election cycle has struck fear and concern in the minds of many investors. Avoiding these common mistakes will help you to step back and take the long view on your retirement investments.
Number One: Failing to have a plan
Without a disciplined investment plan for your hard-earned dollars, you will end up taking unnecessary risks in the markets. Or, you may be without any motivation to invest and your savings are exposed to inflation risk.
When we meet with clients, we spend a significant amount of time asking about their future plans and desires. We learn where they want to live, how they want to live, their financial obligations, and their desires for targeted charitable giving. Knowing these things help create a plan that defines the level of risk needed in one’s investments. The plan created is fluid and can be modified as life and desires change, but there’s a plan … and the plan helps our clients make decisions.
What’s your plan for your money? How will you achieve it? What kinds of risks can you tolerate for the appropriate reward? Are you investing based on your retirement plan or a desire to get rich quickly?
Number Two: Worrying which political party and presidential candidate will win
Last week we received yet another a call from a client worried about the election. Trust me when I say that we understand. This is an emotionally charged election cycle and everyone is on edge. But we should not ignore what we can learn from the past.
Take a good look at the history of the Dow Jones Industrial Average below. As you will see, the annual market returns for Democrat and Republican Presidents are not all that dissimilar when averaged over time:
Is there a possibility that a big political shift in Washington this November could spark more volatility? Yes. However, it is not wise to radically change your investment strategy based on election concerns.
Our advice? Create an investment plan and remained disciplined to work your plan with your advisor. Lord willing, you’ll be investing through many different presidents and administrations. Let me share the advice of my mother when I was all worked up about something: “Son, this too shall pass.”
Number Three: Investing too conservatively or not at all
If you are unduly influenced by the potential short-term market changes from an event like a presidential election, you’ll typically end up investing too conservatively or sitting in cash on the sidelines. Investing must be viewed as a long-term process.
Our advice? Create a projected spending plan in retirement with the help of an advisor. Together, you can forecast how much money you will need, including an inflation assumption. With this, a risk assessment can be created for your current investments, then modified each year to respond to changes in your plans and opportunities that present themselves.
Number Four: Trying to time the market
Are the weeks just before the election a good time to invest, or should you wait until after the election? Or, should you wait until the new year? Or should you wait until after the inauguration? No one has a crystal ball and can tell you with any certainty what to do. This year, the pandemic has made both the markets and the economy behave erratically and made these questions even more difficult to answer with any certainty or possibility of being correct.
Jumping into the stock market is not like jumping rope. The swing of the rope as it hits the ground over and over gives the jumper the ability to see a dependable rhythm as to when to hop in (and then hop out). The market is rarely this predicable. The greatest failure of investors is long-term hesitation for fear of a short-term drop in the account value.
Working with an advisor to determine when the money you invest will be needed in the future should help you move forward with an investment strategy and not attempt to jump rope with politicians (always a bad idea).
Number Five: Getting spooked by one side of volatility
Remember when you were a kid and you found a rubber band? You put it on your finger, stretched it as far as you could pull without breaking it, and you launched it, didn’t you? Did the pulling back of the rubber band scare you or excite you? That’s right. It made you giddy with anticipation of hitting your brother on the neck!
As investors, we all enjoy the upside of volatility when the rubber band is flying across the room to hit our intended target. We just don’t enjoy the stretching back part of volatility. In a growth stock-based portfolio, you can’t have one without the other.
Our advice: You don’t need all your money on November 3rd. You need some of it to live on and for emergencies, and that should be in your checking and savings account. Review your portfolio with your advisor so he or she can show you how it performed over time and how much fluctuation it has experienced during different events. If a brief pullback in your portfolio happens around the election, remember the rubber band illustration.
Number Six: Doing it alone
The greatest challenge in self-directed investing is battling emotion. People make a lot of bad decisions when they are emotional, and this election cycle has become very emotional. If there’s one thing we can say with certainty it is this: Many Individual investors will continue to make emotional decisions about their investments that do not serve them well.
Our advice: Work with an advisor. Advisors consider your tolerance for risk; your timeline for withdrawing money for living expenses and giving; the estimated taxes that will be paid on withdrawals; and erosion due to inflation.
The bottom line
Presidential elections come around every four years like clockwork. We have experienced a number of contentious presidential elections, although many of them happened before we were born or cared about politics. And we hate to tell you this, but there’s probably going to be another polarizing, emotional presidential debate in four years. So take a deep breath, keep your eye on the distant future, and don’t let politics ruin a perfectly good month like November where we should be focusing on turkey dinners and football!