Presidential elections bring heated emotions from both sides, especially when it comes to protecting your financial investments. As humans, we’re often driven by these strong feelings, but it may come as a surprise that they usually don’t have a large impact on financial markets. When they do, it usually comes in the form of short-term volatility. We saw this play out with the market’s sharp drop on the eve of the 2016 presidential election and the new record highs the week after. However, as the election season fades behind us, we historically see a return to normalcy as high emotions fizzle out.
History has taught us that emotional investing is never the safest approach. Instead, a philosophy worthy of your vote is one that promotes variables you can control. Here are four strategies you can implement following an emotional election season:
- Stick to an appropriate long-term asset allocation: Studies have shown that the primary determinant of a portfolio’s performance is your asset allocation, or the percentage of the portfolio allocated to stocks versus bonds. Never determine what is appropriate for you based simply on your age or the rate of return required to accomplish your financial objectives. What works for you may not work for someone who has roughly the same financial profile. Instead, review your own history and zero in on some particularly volatile periods in the equity markets to consider your reaction. An accurate tolerance for risk doesn’t become apparent until you live through a tumultuous period and know how it feels in your gut.
- Minimize your investment costs: Make sure you know the total cost (i.e. fees, commissions, internal mutual fund expenses and transaction costs) for managing your money expressed as an annual percent of your investments. Lower costs improve long-term results geometrically. For example, two identical $1 million portfolios earning 10 percent over 20 years — one with total costs of 1 percent and the other at 2 percent — would have ending balances differing by over $1 million.
- Practice disciplined rebalancing: You should rebalance your portfolio opportunistically, setting targets for each asset class. If the actual value deviates from the target by more than 5 percent, consider rebalancing. Also consider whether rebalancing could be accomplished through additions or withdrawals. Remember and practice the first rule of investing: Buy low, sell high. Disciplined rebalancing forces you to do this.
- Use tax-efficient investment management: A smart investor is aware of the expected tax impact from your investments. Mutual funds with high turnover typically distribute a lot of taxable income. Paying taxes easily can drain 1 to 3 percent a year from your rate of return. Some investments are tax insensitive and could be owned in your IRA or retirement accounts to minimize taxes.