5 Wealth Management Actions for an Election Year

Key Takeaways

• Election years are often stressful and can create uncertainties for investors. The 2024 presidential election, no doubt, will be no exception.
• We suggest investors prepare by having a multi-year financial and investment plan to help avoid letting emotions or unknowns drive financial decisions.
• Markets have generally rewarded long-term investors, no matter the presidential party or the majorities in Congress, and sticking with a plan can help reduce anxiety and increase control.

Overview

Presidential election years can bring about a toxic combination of uncertainty and emotions, creating stress for investors. As the news cycle picks up, you may feel anxious about what possible changes in the White House and Congress could mean for the markets, your portfolio, and policy issues including taxes.

The question though, remains – should you do anything about it, financially? We believe, and data tells us, that stress and anxiety often lead to poor financial decisions. Further, the outcome of the election, along with whatever possible policy changes or shifts may come from it, are unknown.

We suggest that investors retain discipline over the financial decisions that they can control. Keep in mind the actions below to stay on task, including ignore the noise, stay invested based on your time horizon, and pre-plan – whether it’s an election year or not – for volatility in your portfolio.

Ignore the noise

Media coverage of the presential election is ramping up and will likely intensify as November approaches. Constant news about the candidates and their campaign promises can make you wonder if you should make changes to your investment plan. From a market perspective, election-related news may cause short-term movements, but longer term, that “news” may end up being largely noise. On the margins, differing policies may make a difference in slices of a portfolio. But overall, over time, diversified portfolios have generally continued to grow.

Data included in our research (see the chart below) shows that, historically, election year returns have been similar to non-election year returns. When we looked at annual returns of the S&P 500 Index from 1960 to 2023, we found that the average return in presidential election years was 7.3 percent, and the average return during non-election years was 8.8 percent. A difference of this size is less than statistically significant, meaning the difference cannot be attributed to the fact of an election occurring in a particular year.

Simply put, elections likely don’t matter to your portfolio, long term.

The chart below shows that markets have historically rewarded long-term investors who have stayed in the market, regardless of which political party is in the White House.

One dollar invested on Jan. 1, 1961 in a hypothetical portfolio of U.S. large-cap stocks, grew to $571 by April 30, 2024, despite 12 different presidencies, shifting between Democratic and Republican White Houses eight times. And there was little or no pattern in portfolio ups and downs based on the party in the White House. The same result of steady growth over time was generally true of a more diversified portfolio that included a mix of stocks, bonds, and cash.

Over that same 1961 to 2024 period, Democrats held the majority in Congress (both the House of Representatives and the Senate) four times, Republicans held the majority in Congress three times, and all other periods were a mixed majority. Regardless of who controlled Congress, that same $1 still grew to $571.

So, generally it has made sense to ignore the election year “noise,” then stick to your plan.

Stick to your plan

Elections can be emotional. It’s human, natural, and normal to feel elated, satisfied, relieved, disappointed, scared, or angry depending on your vote and the election results. No matter which emotions you experience, though, ample evidence in research and in our work with investors suggests that it’s generally best not to let your heart influence your head when making investing and financial decisions. One of the best ways to do this is to have a plan and stick to it.

An effective investment plan (and broader financial and wealth management plan) should be based on your particular goals and time horizon. What do you want your portfolio to do for you? And when do you need the money? In times of anxiety and high emotion, revisit your plan. Without a plan, it’s easier to act on emotion. No matter how much you have invested, or your age, financial sophistication, or where you are in your investing or wealth life, we suggest that you let the plan guide you, not your emotions. This is a simple but powerful way to help you be in control of your financial decisions.

Stay invested based on your time horizon

Over the long term, investing is fundamentally an act of optimism, believing in the power of investments in a U.S. and global market to grow. Market performance is mainly driven by corporate earnings and the business cycle. There have been, and will always be, market ups and downs, but let your time horizon help drive your confidence – and your portfolio allocation.

One of the largest sources of risk to achieving long-term investment goals is not staying invested in the short term. For example, when investors move to cash during a down market or because of an election result, they may miss out on the eventual rebound and potential growth. No investors have shown that they can consistently time the market perfectly. And being in, or out, of the market due to the result of an election (going back to the 1960s) hasn’t helped investors grow or manage wealth. ??????????????????????????????????????????????????????????????????????????????????????????

The chart below shows what happened to $10,000 invested in a hypothetical portfolio of U.S. large-cap stocks on Jan. 1, 1961, under three different scenarios. If the investor was only invested when a Republican was president, the original $10,000 grew to $102,293 by 2023. If the investor was only invested when a Democrat was president, their $10,000 investment grew to $500,476 by 2023. And if the investor stayed invested the entire time, their $10,000 original investment grew to over $5 million by 2023. This is not to say one political party is “better” for the markets than the other. Rather, leaving money invested, to compound over time, can lead to a significantly better outcome.

Add reserves to manage volatility in your portfolio

Managing volatility in your portfolio is not just true in an election year, but as a wealth management strategy overall. If it’s possible that: (1) you may need some money from your portfolio within the next two to four years, or (2) you feel emotions could lead you to sell more volatile investments in a downturn, then add reserves to your plan, and your portfolio.

By their nature, financial markets are volatile and uncertain over short time periods, and this year’s presidential election is likely to bring some short-term volatility. In response, we suggest that investors do two things:

• First, be clear on the time horizon for each investment and investment account you hold. Are all accounts and investments for the “long term,” such as retirement spending 10 years or more from today? Or is some money needed sooner, for example to fund current retirement expenses or a major purchase? The time horizon you choose, along with but not limited to your tolerance for investment volatility, ideally drives your investment decisions.
• Next, review your asset allocation for each goal. Based on this, choose an appropriate mix of asset classes, according to your risk tolerance (how much risk you can stomach) and your risk capacity (how much risk you can afford – or, in other words, how much money you can take from investments soon without jeopardizing financial stability). Do this for each goal.

We suggest doing this today, before the election, or in advance of any potentially stressful event (which in financial markets, could occur at almost any time). Doing so during more sanguine markets helps provide assurance, no matter the election outcome, that your investments are structured to meet both your short- and long-term goals. Doing so after market volatility (which is inevitable from time to time) is too late.

If you know you’ll need cash from your investments soon (within the next 12 months), for example, is your portfolio structured to do that? If not, consider putting aside what you’ll need within the next year in a money market fund, brokered CD, or U.S. Treasuries with shorter maturities. Historically, these have been relatively stable, defensive assets that can be useful investments for money that will be needed soon.

Then, invest other funds for the longer term. Combining a long-term investing plan with stable assets to draw on soon, if needed, can increase your ability to pay less attention to short-term market volatility, in any cycle – not just an election year.

Prepare for possible policy changes?????????????????????????????????

Beyond the portfolio, we believe a few potential policy issues, such as tax and gift exemption amounts for estate planning, are worth keeping an eye on. Although we don’t expect any major changes to taxes before the election, we do expect 2025 will be a busy year for policy changes.

One of the most pressing issues for the newly elected Congress will be the 2017 Tax Cuts and Jobs Act (TCJA), which is scheduled to expire at the end of 2025. Absent action from Congress, on January 1, 2026, federal income tax bracket tax percentages will rise, returning to pre-TCJA levels, and for affluent Americans, the current estate and gift tax lifetime exemption amounts ($13.61 million for singles; $27.22 million for couples) will fall back to 2017 levels (adjusted for inflation), and effectively be cut in half. Families aiming to transfer assets to future generations using the current exemption amounts could consider gifting strategies now (before 2026) using advanced estate planning strategies including Spousal Lifetime Access Trusts (SLATs) and Family Limited Partnerships (FLPs).

The TCJA will likely be a hot topic during the presidential campaign, but keep in mind that it will be the newly elected Congress, not the president alone, that will decide if all, or parts, of the current bill are extended or expired.

Keeping an eye on taxes and potentially taking advantage of lower taxes now – as well as reviewing estate plans in light of potential changes to lifetime exemption amounts – are steps to consider, working with an advisor.

Bottom line

Presidential elections are often stressful, particularly in what feels like uncertain times, inspiring emotional and potential short-term reaction. Informed investors know that election outcomes have not generally impacted long-term market performance. The economy, in the U.S. and globally, continues to grow. However, emotions can distract and derail even the most informed investors. Use the actions proposed here to maintain discipline and control of your finances.

?Brayton Brandt contributed to this report.

Rob Williams, CFP?, RICP?, CPWA?

As Managing Director of Financial Planning, Retirement Income, and Wealth Management for the Schwab Center for Financial Research (SCFR), Rob leads a team that develops research, insights, methodology, and training for Schwab clients, representatives, and advisors. These focus on financial planning and wealth management across an investor's life cycle, including saving for, preserving, and distributing assets in retirement.

Brayton Brandt, CFA?

As a Research Analyst for the Schwab Center for Financial Research (SCFR), Brayton provides investment research and thought leadership for Schwab clients and advisors, including timely and relevant charts on a variety of investing and wealth management topics.

Important disclosures

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific?recommendation, individualized?tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively.?Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Diversification and asset allocation?strategies do not ensure a profit and cannot protect against losses in a declining market.

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