Dec 07, 2020 -

Posted at 3:54 pm News/Resources

With the U.S. presidential election called, and promising news of a COVID-19 vaccine announced, a U.S. market surge reminds us how keen investors are for a sense of closure.

Looking back, as results from the 2016 election cycle were coming in on the night of November 8, stock market futures seemed to point to a large stock market decline once the market opened the following morning. Markets tend to dislike unexpected change, and as it became clear that we’d have a shift in the political party of the presidency, market futures attempted to price that change in until ultimately opening up instead of down — despite what many “experts” were predicting.

Why? Because markets aren’t about politics or policy, or even the economy. We believe market prices simply represent the sum of all available information. They comprise the major companies of the world, all of which have a vested interest in efficiently and profitably producing the goods and services we need.

The good news: Your portfolio has exposure to many different companies and depending on the specific portfolio that could be close to 10,000 companies spread across 48 different countries and 38 different currencies. And the bonds in your portfolio are higher quality and short term and are intended to help provide a buffer when markets are volatile.

It is good to remember that we don’t stop buying toothpaste because of a down market or who sits behind the Resolute desk. We don’t stop watching TV or doing home-improvement projects or going grocery shopping — which means that the great companies that make all these things should continue to grow and prosper over the long term.

The future, as always, is unknowable. But a portfolio built for the long term is just as valid today as it was at the beginning of the year. As investors, if we can avoid trying to time the market, resist the impulse of emotions, and hold a globally diversified portfolio constructed through an evidence-based lens, we can enjoy a higher probability of achieving our goals.

Come what may between the U.S. presidential election that just ended and the inauguration yet to occur, the results will undoubtedly be attention-grabbing and action-packed. Social media and the popular press will see to that, as they feed on – and are fed by – our fascination over breaking news.

To counter all the excitement, we offer three calming insights:

  • Cause and effect are rarely as direct as we might hope or fear. Please apply this point to any temptation you may be feeling to alter your investments because “X” has just happened, or in case “Y” seems about to.  Pundits will be proclaiming they can predict how the markets will respond to new socioeconomic policies coming out of a new administration. At least in terms of tomorrow’s market prices, they do not know. They cannot know. There are simply far too many interacting interests to make the call.
  • It’s much easier to explain an outcome than to predict it. In this Forbes column, the author describes how scientists have detailed models for explaining why volcanoes occur. But they still cannot predict each eruption. The same can be said for financial markets. We have excellent models for explaining a market’s overall factors and forces. But our ability to predict its individual events or specific moves remains as elusive as ever.
  • Elections come and go. Your investments last a lifetime. As U.S. voters, we have the opportunity to select our next president every four years. As investors, we are best served by measuring the balance of power in our portfolio across decades rather than years. As Dimensional Fund Advisors has demonstrated in this excellent illustration, “for nearly 100 years of US presidential terms [the data] shows a consistent upward march for US equities regardless of the administration in place.”

 

In other words, politics aside, your best chance for achieving your personal financial goals remains the same: Continue to give your investments ample time and space to benefit from the market forces just described. As we move forward together, we hope you continue living according to your values, but heed this valuable advice about your lifetime investments. Stay the course!