There are almost an endless variety of election-related actions that can move the markets quickly. The worst reaction is to panic.
In an Uncertain Market, Vote for Your Investing Plan
It’s certainly unsettling to see markets fall in reaction to any event, as some markets did Wednesday after Donald Trump won election as the 45th president of the United States. But investors should recognize that such turbulence is far from unusual. The markets are not a risk-free zone and professional traders typically react swiftly to major events.
And while U.S. markets were not impacted in the same way as others, it still might be tempting to make investment changes over what you think the future could bring. But if you do, you could find yourself on the wrong side of the market in a hurry.
How Presidential Elections Affect the Long Term
Of course, there remains uncertainty over what will come next. But that’s nothing new. In the end, it’s virtually impossible to determine how the markets will react over the next few months (or years) based on the election of any presidential candidate. Here is what we wrote back in September in an article titled “Election Warning: Mix Politics, Portfolio at Your Peril”:
“Studies show that there is very little difference in market gains based on presidential party affiliation. But again, the past is not necessarily prologue. It’s possible that the president’s party and stock market performance will become closely correlated over the coming decades.”
The bottom line is that we just don’t know what will happen. There are too many economic and business factors outside of the control of a single person, a single party or a single country. And there will likely be unknowable events – political and otherwise – that will push markets up and down in a hurry along the way.
“Volatility and the markets go hand in hand,” said Joe Correnti, senior vice president of brokerage product for Scottrade. “If you react too quickly today, you could end up trading on emotion. This election, and many others, should serve as a reminder to have an investment plan and stick with it.”
A Brexit Lesson for the Short Term
If you’re concerned about the short term, you should consider not acting hastily as well.
Less than 5 months ago global markets fell sharply after citizens in the United Kingdom voted to leave the European Union. Over 2 trading days – Friday, June 24, and Monday, June 27 – the S&P 500 fell more than 5%. But at the close of trading on Tuesday, the index stood higher than it was prior to the Brexit vote.
At the time we wrote the following, and it still holds true today: “The aftermath of the vote may be a prime opportunity to evaluate where you are going in terms of your trading and investing plans.”
Vote for Your Investing Plan
In the meantime, you should take with a grain of salt any prognostications about the fate of the country, the economy, the market and the world. We’re willing to go out on a limb and say that companies around the globe will keep developing great products and services as bold thinking leads to exciting innovation.
And for you, it likely makes sense to focus on your investing plan because that’s the only thing you can control.
“If you have a well-balanced plan, that allows you to sleep at night when volatility comes, then it probably makes sense to stick with it,” Correnti said. “But if you have an overwhelming urge to sell when markets fall, you might need to reconsider your plan to make it less sensitive. Bottom line: You should have an allocation of assets in your portfolio that lines up with the level of risk you’re comfortable with taking.”
Read next: Concerned about big market swings? Check out Don’t Fear Market Volatility, Prepare for It. What did Brexit suggest about how long-term investors should react? Check out Brexit: A Lesson in Diversification and Asset Allocation.
The information and content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.
Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss, in a down market.
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