What the elections have to do with investing

October 27, 2020
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By Rob Schulz

Mansfield Record

I have a client who has become a fantastic saver. He accumulates money over the course of a few months and then writes a check into his investment account. Yesterday, he hit me with the question everybody with cash on hand has right now: “I’m ready to make another investment into our account. Just worried if we should wait until after the election to see what the market does. Thoughts?”

He knows me well enough to know that I’m not going to predict who wins and how that will affect the stock market. Investing hard-earned money on bets in this way is more like Blackjack than retirement planning. Besides, hard data and analysis on presidential cycles suggest there is no correlation between stock market performance and the U.S. President’s party affiliation or election results.

All of that is fine and dandy, but it’s not helpful when you are holding cash and don’t know what to do with it. Should he blindly invest the money now, before the election? Or, should he wait until after the dust settles?

It’s impossible to predict what’s going to happen in the stock market over the next month or so, election or not. But based upon historical data it’s pretty easy to predict that over the next 10, 20 or 30 years that his investment will increase in value regardless of what happens in the short term. Therefore, from a long-term perspective, there is not very much riding on his decision. He can invest his cash now or wait a few weeks and it will have a minimal impact on his long-term return.

From this perspective, he could make a prediction of his own, toss a coin, or even get his palm read if he wanted to and invest accordingly. This, however, is a dangerous path. As humans, we develop biases based on our experiences. In investing, any bias at all is a bad thing that leads to terrible investment decisions based upon poor assumptions.

Let’s say he decides to go all in and invest before the election because he thinks one candidate or the other is going to win and cause the stock market to go straight up. If his prediction comes about, he’ll have gained confidence in his prowess. In reality, he just got lucky, but it will be very difficult for him to resist making further predictions down the line. And just like what happens to everybody who gambles, his luck will eventually run out.

So, let’s say he waits to invest and the same surge in the market occurs. This will possibly destroy his confidence and make it difficult for him to make any decision at all going forward. I see this all the time. Frozen in doubt and stuck in cash as the stock market continues to climb, over time this can be very detrimental as his cash erodes in value against inflation.

Investing based upon how we think the election is going to turn out is a terrible idea, regardless of whether you end up being right or wrong. For my client who is holding cash and needs to invest it, the best answer to his dilemma is to invest half of his cash now, and the other half after the election occurs. This way, he avoids making a bet and comes out fine either way.

Rob Schulz is a local Certified Financial Planner and author of “Thoughts on Things Financial: Your Guide to a Chaotic Money World.” Reached him at rob.schulz@schulzwealth.com. You can buy his book by clicking here: https://www.schulzwealth.com/book/

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