Business owners may be feeling more than just a little apprehensive about the coming election and its impact on your business. Understandably, the question on the minds of many – especially in a campaign cycle that feels increasingly far from normal − is “How will the election affect my business – or even me, personally?”
Earlier this year, US News referenced the following analysis by Wharton School finance professor Jeremy Siegel, author of Stocks for the Long Run: “The Dow Jones industrial average has returned an average of 10.1% in presidential election years from 1912 to 2012, about the same as returns in the average year.” Running slightly ahead of that, the S&P Index returns during presidential all election years within the 1928 to 2012 time frame was 11.25 percent. In fact, in 18 of the 22 elections since the S&P Index began, 82 percent of those election years provided positive performance.
According to Forbes magazine, stock market performance is generally weakest the year after the election of a new U.S. president, and strongest in the third year of the president’s term. However, even Forbes admits that one fact is constant: market cycles are unpredictable.
Only uncertainty is certain
Time after time we’ve seen evidence that the market doesn’t like uncertainty − think Brexit, China and oil prices. But the fact that it’s an election year doesn’t necessarily spell doom and gloom. So far, the market looks to be holding to historical election-year performance. At the time of this writing, the S&P is flirting with an almost 7 percent return.
So, if you’re struggling with heartburn as each new global ‘challenge’ or ‘crisis’ occurs, now’s the time to review your plan and your overall tolerance for risk.
Don’t let emotion get the best of you. A good business investment plan should not only anticipate that short-term market movements will occur, but also stand up to them. If your inclination is to head to the investment ‘sidelines’ because you’re worried about market performance as the election nears, you could risk losing some or all of your investments and have a harder time pursuing long-term financial goals.
The long-term average annual compounded (realized) return on U.S. large-cap stocks over the past 100-plus years, based on data from Morningstar, has been about 10 percent before inflation and 7 percent after inflation. But if you let emotions guide your investment decisions, the risk could be substantial. According to Ned Davis Research, a leading investment research organization, if you had invested $10,000 in stocks mirroring the S&P 500 in December 1979, your investment would have grown to more than $426,000 by December 2013. But if you missed even the 10 best performance days of the market during that time, your $10,000 would have grown to less than $206,000 – or more than 50 percent less.
The bottom line? There’s only one thing that’s predictable, and it’s that we can never accurately predict what impact the upcoming elections will have. If it drops, the market will eventually return to or possibly outperform where it started during an election year. That’s why sticking with a disciplined investment approach over the long-term will pay off.
Work with a financial advisor who can help steady your emotional ship and keep you on track toward pursuing your financial destination – both for your business and for yourself.
Investing involves risks, including the loss of principal. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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