Stocks and Election Years

Are They Good for Each Other?

After a seemingly endless campaign season, the presidential election is nearing its conclusion. As a voter, you may well be quite interested in both the process and, of course, the outcome—but as an investor, you might be wondering how the election will affect you and your investments.

People tend to forget that when the White House is up for grabs, every seat in the House of Representatives—as well as many in the Senate—is up for re-election, too. Coming into the election, incumbents spend a lot of time campaigning and as a result, fewer substantive laws are generally made. Whether this inactivity is good for the country as a whole is debatable, but it tends to be a positive for financial markets, which typically dislike surprises, changes and new directions. Consequently, stocks tend to fare pretty well during presidential election years.

Still, some investors get jittery over how a candidate’s promises or plans might affect particular sectors within financial markets. And if a candidate with particularly worrisome ideas is ahead in the polls, you may see investors flock to or away from the companies—or industries—that are most likely to be affected by a new president’s political agenda. Investors would be wise to remember that campaign promises have been known to become empty ones after an election. And, in any case, a president’s priorities and promises still have to be turned into legislation to have any real impact.

Instead of counting on historical trends in election years, or making moves based on campaign rhetoric, investors should follow an investment strategy built on solid principles. Here are a few suggestions:

Diversify. If you essentially own just one asset class, such as growth stocks, your portfolio could take a big hit during a market decline. But during that same downturn, other types of investments might not fare nearly as badly. In fact, some might even do well. By spreading your dollars among growth stocks, international stocks, U.S. Treasury securities, corporate bonds, certificates of deposit, real estate (possibly in the form of real estate investment trusts, or REITs), and other investment vehicles, you can help reduce the effects of market volatility on your portfolio while also giving yourself more opportunities for success.

Don’t Invest Too Conservatively—or Too Aggressively. If you are by nature a conservative investor, you might primarily want to own investments such as certificates of deposit and money market funds. These vehicles offer significant protection of principal, but little in the way of return. Conversely, if you are an aggressive investor, you might lean more toward growth stocks and other securities that offer potentially high returns; in exchange, you’re willing to accept the price volatility that comes with these investments. Try to find some middle ground between “conservative” and “aggressive” so that your portfolio can help you progress toward your long-term goals, such as a comfortable retirement, without subjecting you to undue risk.

Be a “Tax-Smart” Investor. Investment-related taxes can eat into your returns, so it pays to follow a “tax-smart” strategy. For example, if you hold investments for at least one year before selling them, your profits will be taxed at the long-term capital gains rate, which is 15% for most taxpayers. But if you’re a frequent trader, and you sell investments you’ve held for less than a year, you’ll be taxed at your personal income tax rate, which may be considerably higher than 15%. Another tax-smart move is to contribute as much as you can afford to to tax-deferred retirement accounts, such as your 401k and traditional IRA. If you’re eligible to contribute to a Roth IRA, your earnings grow tax-free, provided you’ve had your account at least five years and you don’t start taking withdrawals until you’re 59-1/2.

Presidents come and go, as does their impact on financial markets. But no one has greater control over your investment success than you—so elect to make the decisions based on your portfolio and your priorities, not who you think will be sitting in the White House come Inauguration Day.

This article is provided by RBC Wealth Management on behalf of Gary Kiemele, a Financial Advisor at RBC Wealth Management, and may not be exclusive to this publication. The information included in this article is not intended to be used as the primary basis for making investment decisions. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance.

RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.