Contributed by: Jaclyn Jackson
Primary season could be worrisome for some investors as they try to figure out who will become our next president, how that person’s political ideologies will influence stock markets, and ultimately how that may impact their investment portfolio performance. I’ve explored the most common myth about political parties and its effect on the US stock market - the result is pleasantly surprising.
Myth: Big government ideologies held by Democrats make them worse for the stock markets while small government and small business driven ideologies make Republicans best for the stock markets.
Bust: Whether a Democrat or Republican is elected, historical data indicates that it has no statistically significant bearing on US equity markets. Illustrated below, both parties have experienced a similar amount of presidential terms with positive equity returns based on the Dow Jones Industrial Average from 1900-2012.
Even though Democrats edge out Republicans by return percentage, there really isn’t much difference once you adjust for the normal variation in stock market returns. The results are reassuring; markets aren’t largely swayed by the president’s political party.
Tips for Politic-Proofing Your Portfolio
While political parties don’t necessarily dictate market performance, they do generate policy plays that influence the economy. Divergent policy priorities around issues like individual taxes, the environment, healthcare, financial regulation, Fed policy, etc. could affect specific market sectors (i.e. healthcare, energy, utilities, and financials).
Yet, investors can be confident in deploying two key strategies to help armor their portfolios against sector specific market fluctuations: diversification and long term investing. Diversification works to improve portfolio risk return characteristics by spreading investment exposure across different asset classes. In other words, it can assist in buffering your portfolio from concentrated portfolio swings to help achieve better risk-adjusted returns. Likewise, long term investing generally guards against short term sector movements by providing those who stick to their investment strategy less volatile returns over time. When you have a well suited, diversified long term investment strategy, you don’t have to fall into the trap of investing based on the political climate.
For more information of the benefits of diversified investing, click here.
Jaclyn Jackson is an Investment Research Associate at Center for Financial Planning, Inc. and an Investment Representative with Raymond James Financial Services.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Jaclyn Jackson and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Diversification does not ensure a profit or guarantee against a loss. Holding investments for the long term does not insure a profitable outcome.