Don't Obsess Over Your Stocks on Election Day
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What is the episode about and who is speaking?
Here's your money briefing for Friday, October 30th. I'm J.R. Whalen for The Wall Street Journal. Markets have been particularly volatile over the past several weeks, mainly due to rising coronavirus infections and failed stimulus negotiations in Washington. But many investors are also worried about what will happen to their stocks and retirement accounts depending upon who wins the election next week. But is that concern justified?
How has recent market volatility been described leading up to Election Day?
Many experts say investors are better off focusing on the things they can control.
More people die from mosquitoes than ever die of sharks or tigers, even though we worry a lot more about sharks and tigers. So remember to focus on the things that are actually going to get you.
That's Dan Egan, Managing Director of the personal finance advisory company Betterment. Coming up, he'll explain what history tells us about market volatility after a presidential election and where individual investors' focus should be. That's after the break.
If you follow the stock markets day by day, these past several weeks heading into Election Day are have been like riding a roller coaster. But how likely are the results of the election to send the markets on more wild swings?
Could the presidential election itself cause major losses in individual portfolios?
To talk about it, let's bring in Dan Egan. He's managing director of the personal finance advisory company Betterment. Dan, thanks for being with us. My pleasure. Thanks for having me. So the market volatility over the past several weeks has many people concerned over things like their 401k, among other holdings. But with regard to the election itself, is that concern well placed?
Oh, definitely not. You know, thinking through what is required to have the election results drive a big volatility or even loss or gain in your portfolio requires a number of things.
What historical examples explain why elections rarely trigger big market moves?
The first is that there needs to be some sort of dramatic impact by the new president on the economy and the stock market. And generally, we've seen that there's no immediate ability to juice returns to change immediate economic impacts on the basis of who's president. The second component of it is that there needs to be a big difference between the candidates and their platforms or their policies, their ability to really move the economy quickly. Once again, there's not a dramatic difference between these two candidates in terms of their economic policies and the short-term impact on the economy or markets. And the last one, which I think is the most important, is that it would have to be a surprise.
It would need to be something that markets didn't see coming. And markets are very, very hard to surprise, at least in terms of things that are going to move the market. Let's go back to 2016. Coming into Election Day, Hillary Clinton had about an 80% probability of winning. So it was a surprise that Trump won back in 2016. We still didn't see dramatic moves in markets the next day. So the set of things that need to happen in order for a presidential election to really cause any dramatic volatility is substantial. Now, the caveat there is what if there is not a clear victor for a long time? What if it's disputed? So I think a good way of putting it is that the stock market doesn't care who wins as long as it's clear that somebody did win.
I think we far overestimate how much impact the elections ever have on stock markets.
How much does a person's own personal bias play a role in their fear factor regarding their investments and an election?
Pretty significantly. We tend to kind of believe that our policies and politics are the ones that are going to lead to good outcomes everywhere, be it the environment or justice or the economy.
How do personal political biases influence investors' fear and behavior?
And so going back to 2016, we saw most of the angst and concern around what was going to happen in the stock market and the economy from Democratic voters, whereas Republicans thought that it was going to be a good thing. There's no evidence that sort of either candidate has a dramatically better economic policy in terms of what's going to happen in stock markets. So I think that's more a matter of kind of letting our politics pollute our portfolios.
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Chapters
7 chapters
1
What is the episode about and who is speaking?
0:05–0:28
2
How has recent market volatility been described leading up to Election Day?
0:28–1:16
3
Could the presidential election itself cause major losses in individual portfolios?
1:16–1:49
4
What historical examples explain why elections rarely trigger big market moves?
1:49–3:27
5
How do personal political biases influence investors' fear and behavior?
3:27–4:33
6
What practical steps should investors focus on instead of obsessing over election results?
4:33–5:40
7
What does past election data say about post-election market volatility?
5:40–7:27
Speakers
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