The 2020 election is moving closer to conclusion, and like many investors, you may have mixed emotions about the future. If you’re looking for clarity and guidance, here are key points for refocusing that post-election stress and anxiety back to your financial plan.
Avoid acting hastily based on election results.
Equity markets moved higher in the week following the election. However, experts’ consistent point of view is to avoid reacting to immediate news related to the election.
Avoid assuming anyone knows how markets will behave based on the president’s political party.
Based on analysis from the Schwab Center for Financial Research, individuals who stay invested over the long term generally outperform those who invest based on which party is in charge.
Source: Schwab Center for Financial Research with data provided by Morningstar, Inc. The chart above shows the growth of $1 invested in a portfolio that tracks the Ibbotson US Large Stock Index from January 1, 1961. January returns in inauguration years are assumed to be under the party that is being inaugurated. Returns include reinvestment of dividends and interest. The example is hypothetical and provided for illustrative purposes only. Past performance is no guarantee of future results.
Avoid assuming major changes in tax law in a divided Congress.
As of the vote count today, it appears Republicans will retain control of the Senate. However, if Democrats end up with a majority, new legislation could pass, affecting the corporate tax rate, the individual tax rate, estate taxes, and the treatment of capital gains and dividends. Even if tax changes could pass in 2021, new rules likely wouldn’t take effect until the beginning of 2022. We generally recommend that you should not make any changes based on the possibility of new tax laws, especially while the state of Congress is still in flux.
Source: Schwab Center for Financial Research with data provided by Morningstar, Inc. The above chart shows what your portfolio value would be if you invested $10,000 in a portfolio that tracks the Ibbotson US Large Stock Index on January 1, 1961 under three different scenarios. The first two scenarios are what would occur if you only invested when one particular party was president. The third scenario is what would occur if you had stayed invested throughout the entire period. Returns include reinvestment of dividends and interest. The example is hypothetical and provided for illustrative purposes only. Past performance is no guarantee of future results.
Avoid planning on any major legislative actions beyond additional fiscal stimulus before year-end.
The two bills on the congressional priority list are a second COVID stimulus package and an appropriations bill to fund the government. In addition, an infrastructure bill and “SECURE Act 2.0” could gain traction in 2021. Our view remains that you should generally not make changes to your financial plans based on possible legislation.
Refocus back toward your personal and financial goals and a plan to achieve them.
Are your concerns and anxieties coming from a specific financial need, rather than the election? Consider the following questions, then connect with your advisor to explore this more:
- Do I have enough in emergency funds?
- Has my monthly or annual cash flow been affected?
- Will I need to make a large withdrawal in the near term?
- Could I be taking too much risk with the market?
What should you consider next?
The election has been stressful for investors – and markets. A divided Congress, however, will make it difficult for either party to advance their platform without compromise, and it will take time to gather support for any sweeping legislation. In terms of financial planning, this lead-time will allow you and your advisor to think through the implications to your financial plans, if any. In the meantime, don’t over-react, and trust the plan.