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How Investors Can Approach Election Market Volatility Thumbnail

How Investors Can Approach Election Market Volatility

The 2020 presidential election is on November 3rd, and the results - no matter what they will be - are likely to affect the markets. Post-election market volatility can be serious business, and I always recommend my clients review their portfolio and take steps to protect their assets in case of a major market drop. 

In this blog, I’ll go over some aspects of election-related market volatility and general investing options. 

What is market volatility? 

Volatility is when the markets rise and fall drastically in a short period. The time can be a few days or even a couple of hours. Cashing in during a significant upswing can boost your profits - while a crash can decimate any earnings. 

Many long-term investors choose to ignore short-term fluctuations, but this isn’t always the best strategy. When you look at volatility caused by a national or global event - such as a presidential election or a pandemic like COVID, the effects of a sudden drop or rise might be more long-term.

While we can’t predict the outcome of these events, we can, in a sense, prepare for the worst-case scenario. 

Potential 2020 post-election volatility

When it comes down to it, emotion moves the market. That’s why we often see sudden drops or rises in asset prices - what happens in the world influences investor confidence. Already the market outlook is on shaky ground due to COVID and the resulting unemployment. And when you add in the 2020 presidential election, the markets are bound to be more volatile. 

Let’s look at the 2016 election as an example. 

Trump’s win was announced around midnight. By 1:30 AM, the futures market pre-sales dropped around 2000 points. But before the market had even opened, it had swung back and was up 2500 points.

That isn’t to say this same scenario will happen again. After all, the economy this time around is entirely different. It’s impossible to say what investor reactions will be. But I’m offering this as an example of how rapid and how extreme these market swings can be post-election.

Election volatility is something you should consider - no matter your political affiliation. The appointment of either candidate is bound to shake up the market, especially in the days after the election. 

What are your options?

Generally, you are going to sell, buy, or hold your assets at any time. But specific assets will be affected differently. Remember how we said above that only the futures market was affected during the election announcement? There’s no way to determine ahead of time which specific market or asset class will be most affected by the election results.

There are really three options, from conservative to risky:

  1. You may decide to convert some of your more risky assets to cash before the election date in case of a long-term drop. 

  2. You decide to keep your portfolio the same and wait out any potential volatility.

  3. You decide to buy more stocks, futures, or other non-cash based assets now in case of a sudden price hike post-election. 

Don’t mistake this for advice - it’s not. These are only broad options when it comes to dealing with volatility. And there are pros and cons to each one:

  • Converting your assets to cash ensures your portfolio’s value won’t drop along with the market. However, it also means you will miss out on any potential upswing.

  • If you keep your portfolio the same, you are open to both the risk of a market drop and the opportunity of raking in more in case of an upswing.

  • If you decide to buy more because you believe the markets will go up, you are locking in a better sell price down the road. But if the asset price drops and stays low, you’ve just lost your investment.

Keep in mind that how volatility affects your portfolio depends on your specific portfolio. What are your asset classes? What sectors and industries have you invested in? What about the strength of your individual stocks or indices?

Several factors come into play  - which is why it can help to review your portfolio with your advisors before volatile periods.

Making tough decisions

When it comes to your finances, it can be stressful to make decisions - no matter how many people you talk to. And even a seemingly clear-cut case may turn out to be a dud due to unexpected events.

That said, advisors also use tools to better view our clients’ specific portfolio options.

Registered Investment Advisors (RIAs) typically have technology that the individual investor may not have. This includes advanced data correlation tools that can predict portfolio outcomes based on different scenarios with a certain degree of accuracy. If you’ve worked with me, you’ve probably seen my software and analysis in action.

But when it comes down to making a difficult decision, it can help to review the potential risk rather than rewards. How much would you be comfortable losing? It’s easy, if not exciting, to imagine sudden gains in case of an upswing. But preserving capital is just as crucial for growing long-term wealth. If you lose a significant amount because you were hoping the market would rise, you’ll spend years making it up.

At the end of the day, only you can make the best decision related to your assets. But you don’t have to go through the process alone. No matter what decision you may, you should have all the information and support from those who know you and the industry.  I highly recommend you talk to your advisor, preferably a fiduciary, to review your portfolio before the election.