INVESTING DURING AN ELECTION: SHOULD YOU SHIFT YOUR STRATEGY?

Tim:[00:00:09]Should you change your investment strategy because it’s an election year? That’s a question that we get. And it’s that time of year, right? We’re less than two months now from the U.S presidential elections. So we’re going to talk about that.
[00:01:03]Welcome everybody to the pilot money podcast, Timothy P Pope here, certifying financial planner, specializing in the planning needs of the professional pilot. And today we talk about the impact that an election year can have on your investment strategy and what you should do or what should you not do. And then we’re going to also talk about some things that you should most certainly be doing whether you’re in election year or not.
[00:01:30]So let’s talk about this, this idea that, Hey we’re in an election season, things are uncertain. And so, you know, I’d like to maybe wait until after the election to make any investment decisions. I don’t know. Maybe you’ve flown with somebody who has that sentiment. And so is that smart to do? Is it not smart to do? Let’s just take a step back and think about the U.S equity markets in general. This is what we’re going to be talking about as the equity markets here, and they are extremely efficient. The U.S equity markets are also fairly complex, meaning there’s a lot of inputs into the market and considerations economically and then at the company level that’s going to have an impact in the market overall, and then in the small sector, perhaps that you may be exposed to. So the presidential elections are simply just one input and all of those inputs. And so this idea that, hey, I’m going to wait until after the election to make an investment decision. It might sound good. It might sound like, you know, it gives you this sense of like, you have control to make your decisions.
[00:02:34]Right? And you know, with new information you can, you can put yourself in a position to take advantage of, you know, whatever happens after the election. But as I mentioned, I mean, the markets are extremely efficient at processing new information and the market prices on stocks that are being traded throughout the day. Are consistently being updated and reflecting all of the available information that we have access to. So right now we’re in early September, the S& P 500, let’s use that as a proxy for the broad market in the U.S it’s up over 15%. And guess what? Everyone who participates in the stock market in 2024, they know that we’re going to have an election in the next two months.
[00:03:14]And at this point in the year, we know who the two major candidates are, and the market is still up over 15%. And we know that on election day, only one of those candidates is going to be president. Okay, and the markets are still up over 15 percent now, if the market stays flat from now until the end of the year, and you’ve decided to not invest any money until after the election, you have lost out on 15 percent of growth. Okay. Now it’s unlikely that the market’s going to stay flat, but. you’ll join me in this thought experiment. Now if the market goes up after the election, you’ve lost out on all that growth from January to the end of and then you get to participate in, whatever growth you have after the election, if the market comes down after the election and we in 2024 flat, then okay, maybe you’ve just lost out on the dividend payments you would have otherwise received.
[00:04:09]Had you been invested, then if it goes down a whole lot after the election, then you look like a genius, And maybe you’ll be on CNN, BC saying like, yeah, you, you called it and everything else, just in that thought experiment, you can see how difficult timing market is based off of a known event, you know, and trying to change your investment strategy. Based on the presidential election, I think the election represents this idea of trying to time the market in general. And you may have heard the saying that time in the market beats timing
the market. When we look at the data, it turns out that the presidential elections don’t have as much of an impact on the stock market as you would think.
[00:04:48]There’s some, some neat research. I’m going to put this in the show notes. I want to put this in your hands. Don’t take my word for it. You look at this research that I’m looking at and then also go conduct your own research. There’s some neat research that has been conducted by dimensional fund advisors. And one of the pieces that you’ll see is going back from 1926, just the range of monthly returns for the S& P 500 or the proxy index that they’ve used for times before it was in existence. So we’re looking at the range of returns. And when you look at the months of presidential elections, it’s kind of scattered all over the place.
[00:05:24]And, they’ve got the parties there and we’re looking at this dispersion of results. And I think that the takeaway that we could see from just that chart is that the returns during the month of a presidential election are unpredictable. And so the election itself is not a really good indicator of where the market returns in that month are going to be. So that’s one chart. It’s a one pager. You can take a look at that. The other chart is pretty fun. And this is pretty friendly too. There’s lots of graphs here, but it’s not the Excel kind of graphs to look at, but what they’ve done in this chart is they went back to 1923. So we’re looking at President Coolidge and what you’re going to see in this chart when you pull it up is you see the president, see his term you’re going to see what party he belonged to you’ll see who controlled the Senate and also the House. You’ll also see if we’ve got the maximum unemployment numbers, you’ll see that you’ll see annualized inflation over the term of the presidency.
[00:06:22]You’ll see the average annual GDP growth. And then the average deficit or surplus as a percentage of GDP throughout that presidency as well. And then when you look at the graph itself there’s going to be some gray that’s going to be overlaid. That’s going to represent any recessions that happened during the presidency. And I think the most interesting and important thing that we’ll see is, okay, so what did the markets do throughout the term? And this is a fun graph to look at. And you can just scroll through time, right? So you start with a dollar of wealth on the first day of that year or whenever the presidency took place. And then you go down to the end of the presidency. Right, and you can just see graphically what happened and spoiler alert. I’ll tell you most of the time We see the graph move up and to the right and I think that this is something that we know we inherently know this because I’m gonna often have you heard somebody, you know, kind of quote Well, you know the average, you know You know, stock market returns, you know, indicated by the S and P is around 12%.
[00:07:24]And then, if you use the compound annual growth rate, it’s actually a little bit lower right closer to 10, you know, high 10s, 10.9 or something like that. Going back to 26, right? So we know that on average, we’re going to have some positive number, but then emotionally. During times of uncertainty, it could be human nature to say, well, you know, I’m gonna wait this one out or this time. It’s going to be different whether it’s an election or bad news in the news cycle, which show me some good news in the news cycle, to be honest with you, you know, there’s a war over here and so on and so forth. Right? Actually, we know we can expect higher expected returns tomorrow, but sometimes the emotions can get wrapped into it.
[00:08:02]And prevent us from making logical decisions. So check this chart out, play with it. Let me know what you think. I think that’s a fun one to look at, but I think that if the answer is a resounding, well, no, I shouldn’t be timing the market and changing my investment strategy based off of an election year. Then what can I be doing? And there’s actually a lot of things that are in our control that we should be doing that we can do. So the first one is you can
control your investment experience, Influence the expected returns in your portfolio, but also influence how much volatility, how much ups and downs you’re going to have, you can control that by controlling what’s called your asset allocation.
[00:08:44]So the amount of stocks that you have, the amount of bonds that you have in your portfolio or how diversified your portfolio is that’s going to have a huge impact on your rate of return. In fact, I seen some studies that indicate between 88 and 90% of your returns will depend on your stock to bond mix. And so you can control your investment experience by controlling how your portfolio is set up. It’s funny here in Charlotte, we have carowinds, the amusement park. And this past summer my two oldest went and they, you know, one took to the roller coaster straight away. The other one had to work on it a bit, but at the end of the summer, I mean, they were just both just two peas in a pod, just ripping and roaring.
[00:09:20]And so that was pretty cool to see, but one thing I’ve shared with him, I say, hey, look. If you’re concerned about the roller coaster failing and that this might be your last ride because the, coaster is going to fail the time to consider that as before we strap in the time to like say, oh my goodness, you know, what if this thing breaks is not as you are on the incline and you hear the clank of the chains taking you up to the top like we’ve made that decision on the ground we’re strapped in and we are ready to roll. Right? So you do the same by controlling. Your investment mix, and that will, in large part influence your returns and also the volatility that you have. The other thing that you can control is how much financial flexibility you have. In your family, and there’s a couple of ways to do it.
[00:10:06]One is looking at future financial flexibility. One is looking at current financial flexibility. And so let’s take a look at the future first, your savings rate gives an eye towards future financial flexibility. So the idea is that, hey, I’m going to save these dollars today. They are going to grow and become profitable. Increase in value and then at some point in the future, I’m going to have I can enjoy those and I’m gonna have more flexibility in my financial circumstance, you can control your savings rate. That’s up to you. And in fact, we’ll see how your savings rate can actually influence your current flexibility or your ability to absorb financial shocks.
[00:10:39]We’ll see that in a moment. Your fixed expenses, however, is how you can control your current financial flexibility. So if you have a large fixed expense footprint. So we think about mortgages, we think about car notes. We think about notes for boats and airplanes. We think about kids and all the activities that they have going on and all these financial commitments that we’ve made and they’re fixed. They’re recurring. We’ve got to do them. The larger that footprint is. Then by definition, you’re going to be less agile financially. So if something comes up, whether an opportunity or a challenge, you’re going to have less room to pivot. One thing that I’ve seen by working with just lots and lots of pilot families is your fixed expenses are often usually directly related to your stress level.
[00:11:28]So typically the higher the fixed expense footprint, we can see some higher financial anxiety and stress is like, man, I’m making good money, but wow, it feels like there’s nothing left over or man, I’m making good money, but I feel like I’m living paycheck to paycheck or I’m one emergency away from being in a really tough spot. And sometimes the, the lower the fixed expense footprint is, as related to income. All of these are related to income here. And sometimes what we see is the, is the lower stress level as it relates to your finances. And so, hear me wrong. I’m not saying don’t go spend money. I’m just saying as it relates to your income, what is that percentage of those fixed expenses there. So control your financial flexibility. The other thing that we can control is our ability to absorb. Okay. Unexpected shocks in our system. And you guys have heard me talk about the emergency fund.
You’ve heard me talk about a brokerage account that gives you a flexibility. There’s no strings attached there. I am not a superstitious person, but it seems like, here recently, there were three. Scenarios that had to work through with clients with unexpected shocks in their financial system.
[00:12:34]And you work through these things and then at the end, the client says, hey, well, you know what? Thank you for holding our feet to the fire and making us have this emergency fund here because while we don’t like to spend this amount of money on these kinds of things, we’re really glad that we have it. And we can, stroke the check and get these things taken care of. So that’s one. And another case where income actually came grinding to a halt and kind of the same thing was, Hey, thank you for working with us to make sure we didn’t overextend ourselves on a real estate purchase. And we’re really glad that we have funds available on emergency funds and also a brokerage account so we can absorb this. We’re not happy that we’re going through it, but wow they do not have the financial stress that is related to also going through something unpleasant. So several different circumstances.
[00:13:24]We’ve been here recently just working through and I think, that emergency fund and insurance. Both of those are not as exciting to talk about as other things when it comes to financial planning, but when you have to use them, you’re so grateful for having them there. The other way that we can control our ability to, withstand and absorb unexpected shocks is just knowing what our expenses are. I raise your hand if you actually know what your expenses are, what, how you’re spending your money. And the idea is that, you know, you probably heard me say before, the idea is not nitpick and always be on a, you know, this really tight budget, no we get to a spot where you’re paying yourself first, you’re saving and your discretionary income is that it’s discretionary. That being said, if you just know whether it’s on a budget whether, however, you record where your money is going. If you get into a tough spot, you can refer to that and you can, you can start to say, okay, well, what adjustments do we need to make?
[00:14:20]How do we need to reallocate cash? And I find when I do this exercise for my family, even though we don’t need to make any reallocations right now, just the exercise, you’re thinking about it. Okay, Wow. This amount is going to this, that amount’s going to that. If we had an issue. Where could I pull back? And I just reallocate those dollars, right? So just that exercise is helpful itself. And then I mentioned your strong savings rate can help. And, as pilots, what do we do if we hit a patch of rough air? Usually we throttle back, right? We pull back on the power in the same thing is when we have a strong savings rate, if we hit a rough patch, it is okay to pull back on those savings.
[00:15:01]Your emergency fund, you can pull back on savings, you can reallocate your cash to get you through this tough time. And then once you’re on the other side, you push the throttles back down and you can increase your savings again. If you don’t have a strong savings rate and you’re not saving very much, then chances are you might have a higher fixed expense footprint. As related to your income, and you don’t have that built in flexibility. So that’s another thing that you can control is your ability to absorb unexpected shocks in your financial system using, you know, a few of those points. The last thing that you can do is you can control the taxability of your investment returns.
[00:15:38]And you can do this by deciding which account types to use and when to use them. So most of you guys are going to be W2, you’re going to have a strong income, And so that means we really can’t leave any opportunity on the table to influence our tax circumstance. So you might’ve heard us talk about the pre tax accounts. You take a tax deduction now, but you’ll pay taxes later. might have heard us talk about the Roth accounts
where you do not take a tax deduction now and your earnings are tax free in the future. You may have heard us talk about brokerage accounts where you can get tax deductions.
[00:16:14]Long term capital gains taxed at either zero, 15 or 20 percent under current tax law. And then HSA, which are health savings accounts which are essentially tax free, right? You get a tax deduction on the front end. That money grows tax deferred. We use that money for qualified health expenses and we don’t pay any tax on the earnings. So you’ve heard us talk about those. You might have some of these accounts or a combination of all of these. And if you don’t have all of them just yet, as a professional pilot, it probably won’t be too long before you do. And nobody really wants a complex financial circumstance, but sometimes it’s just a result of doing well for yourself, And, you know, complexity just kind of, it finds you, it raises its head. And a lot of times when it does, it sticks around for a while. But you can be savvy and control the taxability of your investment returns by deciding what account types to use, when to use them and then also outside investments as well.
[00:17:09]So we talked about, should we change our investment strategy? Because we’re in an election year and election cycle and the data says, no, we shouldn’t, but there is so much that is in our control. And it turns out that I think this is true to life in general, but small steps, small, consistent steps every single day will have a much greater influence on our financial wellness and success than say a presidential election that comes every four years.