The Presidential election: A ‘sleep more and do less’ event for investors
Investors would be wise to ignore an unpredictable election.
Key takeaways
- Every investor wishes they could avoid volatility, but time in the market remains the strongest predictor of long-term investment success. For this reason, volatility is simply part of the journey
- The next potential volatility event is obvious: a presidential election.
- A diversified, resilient portfolio remains one of the best ways to navigate unpredictable events, like elections.
Many investors attempt to play a game of trying to anticipate and avoid the next scary thing.
Investor Brad Gerstner recently joined The Meb Faber Show, where he shared a story about meeting Warren Buffett. Gerstner asked Buffett what else he could’ve done to improve investment performance over his career:
“He said, ‘Slept more and gone into the office less.’"
Buffett was someone who would go from the Thanksgiving dinner table to his office to start reading: annual reports, earnings calls, newspapers, and whatever else piqued his interest. When you read and analyze everything—as Buffett famously does—it can be hard to separate which data points are signal and which are noise.
In the same sitting, Buffet might go from reading railcar reports from Burlington Northern to looking at consumer spending data from American Express.
His brain functions like a data center; however, sometimes that might be counterproductive, which Buffett alluded to.
Why? It might lead you to act when no action is necessary.
The next scary thing
It’s obvious what the next scary thing might be—the presidential election, which enters the final stretch.
Evidence shows that volatility often increases in the lead-up to and aftermath of elections. When you include the fact that it’s been 12 months since we’ve had a 10% market correction, it’s not a stretch to argue that the “writing is on the wall” for increased volatility.
The caveat would be: That is always the case because the future is unknowable.
Specific to investing, political ideology can be a huge tax on investment outcomes if you’re tempted to act on it. Using data from Bespoke, they present three investment scenarios for investing along political lines dating back to 1953:
- The red bar represents the growth of $1,000 only invested when a Republican held the White House.
- The blue bar is $1,000 invested only when a Democrat held the office during the same period.
- And the green bar is the only bar that matters! That’s what $1,000 grew into invested for the duration.
The original $1,000 investment turns into nearly $1.7 million for someone who never acted on political views. The lesson is simple: the amount of time you're invested will always play a heavier hand in investment outcomes than who is running things in Washington, D.C.
The next few days could present a challenge from a behavioral standpoint—nobody is immune from that. But in the same vein, investing has never been a discipline that affords the luxury of waiting for an “all clear” signal. By the time everybody agrees the market has moved past all the bumps, the best returns have likely been made. This is because markets often do their best work (translation: provide the strongest returns) when pessimism persists.
If you’re fearful of US stocks for any reason—be it politics, valuations, or market concentration—remember the simplest framework is to be invested in a portfolio that’s resilient enough that no single event can deliver it a knockout blow.
Specific to politics, the historical evidence is overwhelming that markets, economic growth, and corporate earnings have all grown consistently under Democrats and Republicans alike. Yet, this provides no guarantee of what will unfold in the coming weeks; there’s always the chance that markets become bumpier in the near term.
The best way to navigate any discomfort remains a diversified, valuation-driven approach—the proverbial "sleep more and do less" strategy.
