A pandemic without a vaccine, a prolonged economic slump and now a large number of mail-in ballots threaten to turn election day into election month. What is an individual investor to do with their portfolio amongst all this chaos: adjust their US stock allocation or stay the course?
“While election-related noise may be concerning, we do not believe that any of the potential election outcomes should be reason to go against the fundamental drivers of the market and significantly change portfolio allocations,” advises Principal Global Investors in a recent analyst note.
Investors can run into trouble by placing too much importance on election results, which historically have a short-term impact in terms of volatility. The problem with betting on an outcome is that it involves too many scenarios to consider: the Senate, House of Representatives, and White House are all up for grabs and could be won by either party, and any combination of these scenarios affects the legislative agenda differently. And none of these scenarios factor in the actions of the Federal Reserve.
There are real risks, of course, particularly if voting irregularities and mail delays lead to a protracted legal fight over a narrow margin of victory, as we saw with Bush-Gore in 2000. Then again, the margin of victory could be large enough to relieve us of such suffering, even if that scenario doesn’t sound very 2020. We just don’t know. The election is a risk event, with good outcomes and bad ones.
Analysts tend to see Biden winning as bullish for utilities, green energy, and healthcare, and Trump’s deregulation agenda as benefitting the energy sector and fin-tech, but there’s no guarantee that any of this will happen.
“Our research shows that adjusting portfolio allocation in order to position for who is most likely to win is a dangerous strategy,” warns Principal Global Investors. In other words, if you’re a committed long-term investor, doing less is more.
Reassess your risk tolerance
You might not want to pick winners and losers, but should you lower your overall exposure to US stocks? That depends on your risk tolerance. Finding the right balance of stocks, bonds, and cash is based on your time frame and comfort with risk. Ask yourself these questions:
- How much has your financial situation changed since the pandemic started?
- Think about your most important financial life goals and estimate when you will withdraw money from your account. How much will you need?
- Are you planning to withdraw your investments anytime soon?
- Can you handle investment fluctuations over time?
If your planned withdrawal date is many years away, you might be comfortable with a portfolio carrying higher risk in exchange for potentially higher appreciation. However, with a shorter timeline you might want to reduce your exposure to U.S. stocks, and invest in more bonds or cash.