Staying Invested for the Long Term: Why Political Power Shifts Shouldn’t Dictate Your Investment Strategy
|
|
The financial markets tend to react to numerous factors, from economic indicators and corporate earnings to global events and, quite notably, political shifts. Understandably, many investors may feel anxious when there’s a change in government leadership or a new policy agenda on the horizon. This is especially true in countries like the United States and Canada, where political cycles and election seasons can drive uncertainty and volatility. Despite these fluctuations, long-term investors are generally better off staying the course rather than trying to time the market based on political changes. Here’s why holding onto investments—regardless of which party is in power—tends to be a better strategy.
|
Political Parties and the Stock Market
It’s tempting to assume that one political party’s rise to power could spell boom times for the markets, while another party might lead to uncertainty or even downturns. Yet, historical data shows that market performance is not strictly tied to which party controls the government. For instance, looking at U.S. markets since the mid-20th century, the S&P 500 index has consistently grown over time, regardless of whether Democrats or Republicans were in office. Similarly, in Canada, market performance has shown resilience across different political administrations.
In fact, long-term data indicates that the economic policies of individual administrations have a limited impact on overall market performance. While policies can influence specific sectors, like energy, healthcare, or technology, the broader market’s growth is driven by a complex mix of global economic factors, corporate innovation, consumer demand, and investment trends. As such, fixating on political cycles often causes investors to make hasty decisions, missing out on potential gains that accrue over the long run.
The Pitfalls of Timing the Market
It’s a common saying among financial professionals: “Time in the market beats timing the market.” When political changes seem uncertain or potentially disruptive, it may be tempting to pull money out of the market in hopes of reinvesting once conditions feel more stable. However, trying to time the market accurately is extremely challenging.
Consider this: between 2002 and 2022, if an investor had missed just the 10 best days in the stock market, their overall returns would have dropped significantly. According to J.P. Morgan Asset Management’s study on stock market returns, missing the 10 best days in a 20-year period could cut returns by more than half. This underscores how market timing can lead to missing out on some of the best-performing days—many of which tend to follow periods of significant decline.
In fact, some of the biggest one-day rallies have occurred amid bear markets or economic downturns. Political events can create volatility, but those fluctuations often give way to market rebounds that can’t be predicted with precision. Investors who attempt to jump in and out of the market often find themselves buying high and selling low, resulting in poor performance.
Historical Ratios: Up Markets vs. Down Markets
Data from U.S. and Canadian stock markets supports the principle that markets generally trend upward over time, even with periodic downturns. In the U.S., for example, the stock market has been “up” in about 74% of years since 1926. In Canada, the numbers are comparable: the TSX has posted positive returns in around 70% of the years since its inception. This means that while market downturns do happen, they’re far less frequent than periods of growth.
When downturns do occur, they’re often shorter in duration than periods of expansion. Research from Fidelity shows that, historically, bull markets—periods of rising stock prices—last an average of 9 years, whereas bear markets typically last about 1.5 years. For long-term investors, this means that even if markets dip due to political or economic factors, the eventual recovery is likely to outlast the downturn, leading to overall positive returns.
Compounding and Long-Term Gains
One of the most powerful reasons to stay invested is the effect of compounding, which allows gains to generate additional gains over time. Compounding occurs when investment earnings, such as dividends or interest, are reinvested to generate more earnings. This process accelerates wealth accumulation, but it requires time to work effectively. Attempting to time the market interrupts this compounding process, which can reduce potential gains significantly.
For example, an investment of $10,000 in the S&P 500 in 1992, left untouched for 30 years, would have grown to approximately $208,000 by 2022, assuming historical average returns. However, taking that investment in and out of the market during politically turbulent times would likely have eroded those gains. For compounding to work effectively, the investment needs time to grow—and this means remaining invested during both market peaks and troughs.
Diversification as a Buffer Against Volatility
While staying invested is important, another strategy to weather political and economic changes is diversification. A well-diversified portfolio spreads investments across asset classes (stocks, bonds, real estate, etc.) and sectors. This reduces the impact of market volatility driven by political events, as different asset classes often react differently to market conditions. For example, bond prices tend to rise when stocks decline, acting as a buffer during periods of market downturns.
By diversifying, investors can reduce the risk that a change in political power or an economic policy shift will have an outsized impact on their portfolio. Diversification doesn’t eliminate risk, but it helps balance the portfolio, making it easier to hold onto investments without being overly influenced by short-term market fluctuations.
Embrace a Long-Term View for Financial Success
Regardless of political shifts, long-term investment has proven to be one of the most effective ways to build wealth. Investors who stay invested, even in times of volatility, have historically reaped better returns than those who try to time their investments around political changes. Political events will always create waves, but over time, the general trend in stock markets has been upward.
In conclusion, the key to successful investing is to adopt a long-term mindset and resist the urge to react to political events. History shows that markets recover from downturns and that time in the market is far more valuable than attempting to time it. By staying invested, diversifying, and leveraging the power of compounding, investors can focus on reaching their long-term financial goals, no matter who’s in office.
It’s tempting to assume that one political party’s rise to power could spell boom times for the markets, while another party might lead to uncertainty or even downturns. Yet, historical data shows that market performance is not strictly tied to which party controls the government. For instance, looking at U.S. markets since the mid-20th century, the S&P 500 index has consistently grown over time, regardless of whether Democrats or Republicans were in office. Similarly, in Canada, market performance has shown resilience across different political administrations.
In fact, long-term data indicates that the economic policies of individual administrations have a limited impact on overall market performance. While policies can influence specific sectors, like energy, healthcare, or technology, the broader market’s growth is driven by a complex mix of global economic factors, corporate innovation, consumer demand, and investment trends. As such, fixating on political cycles often causes investors to make hasty decisions, missing out on potential gains that accrue over the long run.
The Pitfalls of Timing the Market
It’s a common saying among financial professionals: “Time in the market beats timing the market.” When political changes seem uncertain or potentially disruptive, it may be tempting to pull money out of the market in hopes of reinvesting once conditions feel more stable. However, trying to time the market accurately is extremely challenging.
Consider this: between 2002 and 2022, if an investor had missed just the 10 best days in the stock market, their overall returns would have dropped significantly. According to J.P. Morgan Asset Management’s study on stock market returns, missing the 10 best days in a 20-year period could cut returns by more than half. This underscores how market timing can lead to missing out on some of the best-performing days—many of which tend to follow periods of significant decline.
In fact, some of the biggest one-day rallies have occurred amid bear markets or economic downturns. Political events can create volatility, but those fluctuations often give way to market rebounds that can’t be predicted with precision. Investors who attempt to jump in and out of the market often find themselves buying high and selling low, resulting in poor performance.
Historical Ratios: Up Markets vs. Down Markets
Data from U.S. and Canadian stock markets supports the principle that markets generally trend upward over time, even with periodic downturns. In the U.S., for example, the stock market has been “up” in about 74% of years since 1926. In Canada, the numbers are comparable: the TSX has posted positive returns in around 70% of the years since its inception. This means that while market downturns do happen, they’re far less frequent than periods of growth.
When downturns do occur, they’re often shorter in duration than periods of expansion. Research from Fidelity shows that, historically, bull markets—periods of rising stock prices—last an average of 9 years, whereas bear markets typically last about 1.5 years. For long-term investors, this means that even if markets dip due to political or economic factors, the eventual recovery is likely to outlast the downturn, leading to overall positive returns.
Compounding and Long-Term Gains
One of the most powerful reasons to stay invested is the effect of compounding, which allows gains to generate additional gains over time. Compounding occurs when investment earnings, such as dividends or interest, are reinvested to generate more earnings. This process accelerates wealth accumulation, but it requires time to work effectively. Attempting to time the market interrupts this compounding process, which can reduce potential gains significantly.
For example, an investment of $10,000 in the S&P 500 in 1992, left untouched for 30 years, would have grown to approximately $208,000 by 2022, assuming historical average returns. However, taking that investment in and out of the market during politically turbulent times would likely have eroded those gains. For compounding to work effectively, the investment needs time to grow—and this means remaining invested during both market peaks and troughs.
Diversification as a Buffer Against Volatility
While staying invested is important, another strategy to weather political and economic changes is diversification. A well-diversified portfolio spreads investments across asset classes (stocks, bonds, real estate, etc.) and sectors. This reduces the impact of market volatility driven by political events, as different asset classes often react differently to market conditions. For example, bond prices tend to rise when stocks decline, acting as a buffer during periods of market downturns.
By diversifying, investors can reduce the risk that a change in political power or an economic policy shift will have an outsized impact on their portfolio. Diversification doesn’t eliminate risk, but it helps balance the portfolio, making it easier to hold onto investments without being overly influenced by short-term market fluctuations.
Embrace a Long-Term View for Financial Success
Regardless of political shifts, long-term investment has proven to be one of the most effective ways to build wealth. Investors who stay invested, even in times of volatility, have historically reaped better returns than those who try to time their investments around political changes. Political events will always create waves, but over time, the general trend in stock markets has been upward.
In conclusion, the key to successful investing is to adopt a long-term mindset and resist the urge to react to political events. History shows that markets recover from downturns and that time in the market is far more valuable than attempting to time it. By staying invested, diversifying, and leveraging the power of compounding, investors can focus on reaching their long-term financial goals, no matter who’s in office.