Elections and the Market…6 Months Later


 

Before the election, I wrote a post talking about how the market didn’t react in predictable ways to the election of a president.  Despite all of the evidence, many investors and experts alike predicted a crash if Biden was elected.  The theory was that his policies of wanting to raise taxes and make it harder for businesses to operate would be bad for companies, the economy, and the overall stock market.  We had a number of clients call in either asking if they should sell their stocks, or demanding that we do it on their behalf once the election results were in.  Unfortunately, for those who let emotion and fear get the better of them and did end up selling out, they missed what has been an incredible run in the stock market over the first 6 months since Biden was announced the winner.

While large companies (S&P 500 stocks) have performed nicely, returning 24%, it’s actually smaller companies that really took off, with the Russell 2000 and 2000 Value returning 39% and 52% respectively.  This is a massive run-up from a historical perspective, and those that missed it will never recoup this missed opportunity.  There has been a lot written about the value of working with a financial adviser, but probably the single biggest benefit is if that adviser is able to help you avoid a generational mistake.  A lifetime of good, disciplined investing can be sabotaged by one seemingly innocuous mistake.

Think about the ramifications for an investor who had spent 20 years saving prudently and investing wisely and had accumulated a $1 Million portfolio. What would have happened if this investor had decided to go to cash when Biden won the election?  A mix of the 3 above asset classes generated appx. a 40% return, which would have increased the value of the account from $1 to $1.4 Million.  Let’s assume he cuts his losses and buys back in today and never again deviates. In 10 years at a 7% rate of return, his account doubles to $2M.  However, The magic of compounding unfortunately applies to mistakes as well, and had he just stayed invested, instead of $2M, he would have $2.8M.  Simply giving into fear and being out of the market for just 6 months in a 30-year investing lifetime resulted in this investor ending up with $800,000 less than he otherwise would have had.

While this was a hypothetical story, the underlying idea is all too real. It is really hard to go a lifetime without succumbing to the fear of a market drop or the greed of a market bubble.  For those reading this thinking this was just an excuse to rub it in the face of Republicans who feared Biden, 4 years ago there were as many if not more people that feared what a Trump presidency would mean for the market.  So what happened to those on the other side of the aisle who sold off upon the news that Trump had won?

They also missed out on a significant run-up, and one that continued on until the last year of his presidency.  The point of this not a told-you-so, but instead can hopefully be used as learning opportunity.  If you weren’t one that was scared by Trump or Biden, odds are there is some other emotional response that might tempt you to make an imprudent investing decision somewhere along the way.

Hopefully this can serve as a reminder that fear and greed can be powerful emotions, and that allowing them to drive the bus even for a short while can have a disastrous effect.  Finding an adviser that is knowledgable and trustworthy, and here’s the kicker, actually trusting them, can be the most important decision you can make in having a successful investing experience.

1 Comment

  1. Burt Williams on May 10, 2021 at 5:32 pm

    Love Kenny’s ‘candid’ and relatively easy and understandable take on issues that impact our money. Kenny speaks in layman-type terms that even a person like me can relate to and completely understand. Thanks for this!

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