Are election years good for stocks?

As an investor, what can you expect during an election year?

In the last 11 presidential election years, the market (as measured by the Dow Jones Industrial Average) has been up nine times and down twice. But, as you’ve no doubt seen in the small print: “Past performance doesn’t guarantee future results.” That’s certainly true of performance during an election year. No matter what happened the last time around, you can’t count on positive results in 2016, especially when the markets have had a rough start to the year so far.

Many people tend to forget that when the White House is up for grabs, every House seat — as well as many in the Senate — is up for re-election, too. The incumbents running for those seats spend a lot of time campaigning and, as a result, fewer substantive laws are generally made. Whether this inactivity is good for the country as a whole is debatable, but it tends to be a positive for the financial markets, which typically dislike surprises, changes, and new direction. Consequently, stocks tend to fare pretty well during presidential election years.

Still, some investors get jittery over how a candidate’s promises or plans might affect particular sectors within the financial markets. And if a candidate with particularly worrisome ideas is ahead in the polls, you may see investors flock to or away from the companies, or industries, that most likely to be affected by a new president’s political agenda. But investors would be wise to remember that campaign promises have been known to fade away when the election is over. And, in any case, a president’s priorities still have to be turned into legislation to have any real impact.

Instead of counting on historical trends in election years, or making moves based on campaign rhetoric, investors should follow an investment strategy built on solid principles. Here are a few suggestions:

  • Diversify. If you essentially own just one asset class, such as growth stocks, your portfolio could take a big hit during a market decline. But during that same downturn, other types of investments might not fare nearly as badly — in fact, some might even do well. So, by spreading your dollars among growth stocks, international stocks, U.S. Treasury securities, corporate bonds, certificates of deposit, real estate (possibly in the form of real estate investment trusts, or REITS), and other investment vehicles, you can help reduce the effects of market volatility on your portfolio, while giving yourself more opportunities for success.
  • Don’t invest too conservatively — or too aggressively. If you are by nature a conservative investor, you might primarily want to own investments such as certificates of deposit and money market funds. These vehicles offer significant protection of principal but little in the way of return. Conversely, if you are an aggressive investor you might lean more toward growth stocks and other securities that offer potentially high returns; in exchange, you’re willing to accept the price volatility that comes with these investments. Try to find some middle ground between “conservative” and “aggressive” so that your portfolio can help you progress toward your long-term goals, such as a comfortable retirement, without subjecting you to undue risk.
  • Be a “tax-smart” investor. Investment-related taxes can eat into your returns so it pays to follow a “tax-smart” strategy. For example, if you hold investments for at least one year before selling them, your profits will be taxed at the long-term capital gains rate, which is 15% for most taxpayers. But if you’re a frequent trader and you sell investments you’ve held for less than a year, you’ll be taxed at your personal income tax rate, which may be considerably higher than 15%. Another tax-smart move is to contribute as much as you can afford to tax-deferred retirement accounts, such as your 401(k) and traditional IRA. If you’re eligible to contribute to a Roth IRA, your earnings grow tax-free, provided you’ve had your account at least five years and you don’t start taking withdrawals until you’re 59-1/2.

Presidents come and go, as does their impact on the financial markets. But no one has greater control over your investment success than you — so elect to make the decisions based on your portfolio and your priorities, not who you think will be sitting in the White House this fall.

Lauri Binius Droster is senior vice president and branch director of RBC Wealth Management and leader of The Droster Team, Madison office.

RBC Wealth Management does not provide tax or legal advice. We will work with your independent tax/legal advisor to help create a plan tailored to your specific needs. © 2015 RBC Capital Markets, LLC. All rights reserved.

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