Welcome back to Financial Foundations, brought to you by Base Wealth Management, where we are the foundation to your financial plan. I’m your host, Dustin Taylor. I’m your co-host, Alex Wolfe, Certified Financial Planner. And today we have back with us Jeremy Riggs, CFP. Thanks again for joining us, Jeremy. Happy to be here. Today we’re talking about the upcoming election. Election years can stir up a lot of uncertainty, both politically and economically. With campaigns, debates, and changing policies, it’s easy for the market to become volatile. But don’t worry, we’re here to answer your questions and guide you through this election year. Let’s start by looking at some historical context. Jeremy, can you talk about historically how election years have performed? Yeah, happy to. So there’s a lot of volatility in election year. If you think about it, especially with elections here, they’re very close.
So you’ve got basically a 50-50 chance of one party being happy, one party being upset, and then that causes a lot of unrest. So if you were to look at 2008 election, there was a lot going on with that, not just on the parties, but we were going through recessions. We had a lot of other things compounding in our volatile year. Whereas we fast forward to 2016, the things that we were worried about happening in 2008 no longer are applicable because the geopolitical and a lot of what’s happening in the country has changed. And Alex, how does a typical election year go, like as far as trends? I think that it usually ends in an upmarket, right? But how does it begin? How does it go through the middle of the year as well? Yeah, it’s a common question. And we hear recently from a lot of clients wondering kind of how we can expect the rest of the year to play out. And traditionally, as Jeremy mentioned, election years are more volatile in the market. There’s uncertainty, which is a driver of volatility in the stock and bond market and the other economic factors going into it and how the candidates are, you know, jogging for positioning and talking about potential policies that they would like to see implemented.
And some of them are, you know, for show, I think you’re getting into like hot topics. So you may have one candidate say, well, I’m going to do this and I’m going to restore this tax credit for families, or I’m going to cut this, you know, tax bracket. And then of course, it’s just like a debate. The other side is saying, well, I’ll make this child tax credit and I’ll make the income restrictions less and I will bring more business here to America. So there’s a lot of things that just kind of, it’s almost like watching a ping pong table match where you’re just back and forth and you’re like, okay, what of this is noise and what do I really need to pay attention to? Right. I think that’s the important piece. And to answer your question, generally the election years finished positive in the stock market, somewhere between five and 8% overall, historically speaking.
So they do end up positive in terms of results or returns in the stock market. But to the political debates and the things that they’re, you know, running on brings that kind of ping-pong effect. You’re looking at the candidates and they’re talking about the things that they’re promising or wanting to implement when they get into office, and how does the market react to that? And some of it stems from, well, you know, if they get elected, but also what happens in the House and the Senate races, that actually has a larger effect than who holds office from a presidential standpoint. That’s a really good point. Like, you know, people get so focused on their candidate winning the White House, and it’s like, well, what if their candidate doesn’t have enough power to change any laws or taxes because they don’t hold Congress or Senate? Or what happens at your local elections that may affect your state more than you realize? Yeah, I think you’re getting into now that it doesn’t really, historically speaking, and maybe one of you can jump in here, but historically speaking, it doesn’t really matter who wins the presidency, which party does. The market’s not generally affected much by that. Is that accurate? Yeah, that’s completely accurate.
When you look at historical market returns for each winner of the election, regardless of political affiliation, there’s not a lot of deviation. Yeah. There’s a lot of studies out there. There’s one I was reading last week that went back to the 1930s, and they measured it in 10-year increments and said, okay, if you were to invest $10,000 at the beginning of this election cycle, what would have happened? And they listed it all out, what was happening in the 30s, what was happening 10 years ago, 20 years ago, there’s always something that’s affecting the market, but how does that actually play out? Because a lot of questions I get are, well, I’m going to wait until after the election before I make any changes, I’ll just sit in cash, and it’s like, well, is that really the best decision? Because that means every four years, or every two years if we count mid-cycle, we have to create a new plan. So I like to take a step back and say, well, what has the market done over the last 90 years? And if you measure that in 20 out of 20 market cycles, your investments have been positive.
If you would put $10,000 in, you would have had a positive return. And then out of 18 out of those 20 periods, your money would have doubled. So it’s like that should help us override, okay, well, cash is not the answer here for your investments. Let’s get you invested in something that’s diversified that you feel comfortable with that regardless of what happened in November, you know, you’re in a good place. You started a point there that I wanted to bring up, which is that as you guys already said, generally the election year ends on a positive note, but there’s always those outliers. So why wouldn’t someone at the beginning of an election year just say, you know what, I’m going to pull my money out of the market and let the market be so volatile and then put it back in after there’s some more stability?
That’s a great question. I think one of the things I’d look at, especially in the recent history, inflation, if you go anywhere, things are more expensive. So if we come out of the market right then and say, okay, well now inflation’s your biggest enemy because it’s reducing the power of your dollar and you’re not really making anything. Maybe you’re making a little bit on a money market but with the recent Fed cuts like that’s going to continue to go down. And then I think the bigger hurdle is if we come out what is the signs that you should go back in? Because most people when I say okay if you sell it we’re in the cash when are we going to go back to market? Well when everything is better. Well the problem with a lot of that is we don’t know everything’s better until the market’s at an all-time high. So maybe we came out of the market in January and it’s you know now it’s November. What has the S&P done this year? We consistently have been hitting new highs. It’s like well you’ve missed out on all of that growth just to avoid a little bit of volatility. That’s why I would go back and say when do you need this money? Is it next year? Is it two years from now? Is it ten years from now? Maybe we have time on our side and we can ride out some volatility.
Right just as this year’s example yes the S&P 500’s up 22-ish percent as of the recording of this podcast. So for avoiding volatility, you would have given up possible returns of 22%, maybe less depending on how you structure your investments. But using that S&P as a benchmark, you can see that if you did weather the volatility, you’ve been rewarded for your time in the market. And that’s something that we talk about time and time again is not timing the market. And unfortunately, political years or election years is one of those years that a lot of people try to do that. Okay. So we’ve established that we’re going to leave our money in, we’re not going to try to time the market. So what are some strategies for investing during an election year? I would say where I like to start off is when I mentioned earlier, what’s the timeframe? You know, is this short-term money, long-term money? Maybe some of your assets are for the next generation and we don’t have 10 to 20 years, you’ve got 40 years before that person needs the funds.
I think that’s where you start, to find when you need the money. And then the next part I would go into is diversifying your portfolio. I know a lot of advisors have talked about that, but does your portfolio align with your risk tolerance? That’s something that we do here with all of our clients, is, hey, let’s start with what you feel comfortable with, what’s your risk tolerance, then build a portfolio that aligns with that. So those would be the first two things I would start with. Yeah, I tend to agree. And then from there you can look at, you know, economic things. You know, how are things going, generally speaking, the economy, how’s inflation doing, labor markets, wage growth, things like that, to help you make some more strategic moves, but overall maintain that diversified approach. So now that you’ve established some strategies, how can someone, an investor, like kind of maintain their sanity during this time with all the volatility?
A lot of investors fall trapped to in election years are things like recency bias, confirmation bias. And we did a video or a podcast on this recently and that really highlights how emotional a lot of our decisions are, especially when it comes to money and investing. Money’s a very sensitive topic to talk about, so you need to kind of put it in a context. And the way I do this with myself, it’s like, okay, when do I need these funds? It’s important to have an emergency fund. Yeah, that can sit in cash, but when I think about will the things that are happening right now matter in 10, 20, 30 years, that helps me put a little bit of distance. And that’s what I can counsel my clients. Like, can you put distance between you and November, you and the new year? And then step back and say, I don’t really need all this money right now. And that helps give you some breathing space. The other thing I normally suggest like, is this noise or is this actual fact? Because regardless of what the candidates are saying, what is actually going to make it into law and then what is actually going to be signed, that’s when we need to look into, okay, how does that signed law affect you?
What’s noise right now? I mean, it may be a waste of time to even look at it. Right. I think it also goes to control what you can control now. And even when it comes to a lot of our clients that are very close to retirement or just entering that retirement phase of their life, they seem to kind of be the most cautious. But again, highlighting the importance of addressing when you need money, what accounts do you have funding your goals and things like that. And just because you’re nearing or are at retirement, you don’t need that whole account in the next year. So it’s important to have some safe money that you know is guaranteed to be there for the next year or so. And then the rest of it, maintain a disciplined process. So no matter what’s happening in the stock market during an election year, you should maintain discipline, ignore the noise and stay informed.
Always check with your financial advisor to make sure you’re on the right track. One way that you can stay informed is to check back here often for our podcast, to visit our website at basewealthmanagement.com to see other videos and articles on these topics and more. You can also subscribe to our podcast on your favorite listening app and submit any questions you’d like us to go over or any topics you’d like us to see covered here on the podcast. You can send those into us at question@basewealthmanagement.com. If you have any more questions for Jeremy, you can reach him at Jeremy at basewealthmanagement.com. Thanks for coming, Jeremy. Thanks for having me back. Enjoy the time. I’m Dustin Taylor. I’m Alex Wolfe. Happy listening.