Over the past few weeks, we've had multiple discussions about the upcoming election and its potential impact on portfolios. Some have expressed concern about anticipated volatility in the market -- news flash, the market always has volatility. Some have even expressed moving all assets to cash or CDs to wait out the election. This option seems particularly attractive since all cash-type investments pay 5% or more, except for a typical bank checking account (a topic for another blog). We've summarized our responses below.
A few election comments.
- Recent stock market returns have been good, with international stocks up mid single digits and US stocks up double digits. This seems strange if everyone is predicting a stock market crash related to the election. The stock market reflects the collective decisions of millions of individual investors who see the same things you see. We are personally not excited about either candidate because we believe this country could and should do better, but both are known quantities. This means that regardless of the outcome, we can expect more of the same and few surprises.
- Historically, elections haven't mattered to long-term returns, and markets are good predictors of eventual outcomes, so it is impossible to outperform by trying to predict the result and the subsequent market reaction. This essentially means you can't add value by employing a strategy of going to cash. You must know something everyone else doesn't know. As we said, a Trump vs. Biden election won't have many surprises.
- Any money you need in the next five years should be in CDs/cash or short-term bonds (and it is for WJ Clients). For money required beyond the next five years, it doesn't make sense to invest it in safe investments. Growth is what matters. Why would you put money you will spend in 2035 in CDs? Do you think stocks will beat cash over the next 10 years. If so, you should own them now.
- CDs, cash, and very short-term bonds have no upside. On the other hand, intermediate to long-term bonds can appreciate and provide yields comparable to CDs. Suppose you are concerned about some kind of election calamity that plays out. In that case, the FED will cut rates, and a current bond portfolio will likely earn double digits compared to a limited 5% per year in cash (and that rate will go down if the FED does cut rates). Therefore, we are saying that even in that scenario, the investment strategy of moving all assets to cash now wouldn’t even be the best decision. In that case, a portfolio's bond portion would benefit significantly more in an election calamity than cash/CDs.
Our client’s portfolios are positioned for an election mishap just as they are positioned to provide adequate growth to support our clients' needs over the next thirty years. We don't see any reason to abandon it based on short-term concerns.
Yes, elections have consequences, but very few are related to long-term wealth accumulation.
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