Presidents, Politics and Your Retirement Portfolio

I’m getting calls.

“I think I might like to get on the sidelines with the upcoming election.”

Usually spoken carefully so as not to be politically charged but, either way, the theme is the same, most clients and acquaintances are preparing for a Biden/Harris presidency.  And many think the market will drop.  Here’s a look at the markets under different administrations… see the full report  here.

Still, Covid-19 remains the bigger economic story as the virus permeates the mid-west, yet also limits activity in the rest of the country, especially those in northern states, and around the world.  I’m not one to decipher how bad things really are vs. how bad they are professed to be, I only know our economy remains stifled on many fronts as we work through the economic uncertainty and epidemiological unknowns.

With millions out of work, the pharmaceutical industry’s success may be the most important story of all.  That said, vaccines aren’t perfect though we’ll need a good one to move forward in a confident way:

“ In a study published July 15 in the American Journal of Preventive Medicine, my colleagues and I used a computer simulation of every person in the country to show how effective a vaccine would have to be and how many people would have to get vaccinated to end the pandemic. We found that a coronavirus vaccine’s effectiveness may have to be higher than 70% or even 80% before Americans can safely stop relying on social distancing.  By comparison, the measles vaccine has an efficacy of 95%-98%, and the (yearly) flu vaccine is 20%-60%.” – Bruce Y. Lee

So as you think about presidential elections and Covid-19 vaccines, it may be best to consider thinking in stages…

Thinking in Stages

Have you ever heard of stage-one and stage-two thinking? They’re terms popularized by economist Thomas Sowell in his book, “Applied Economics: Thinking Beyond Stage One.” Basically, before acting on an event’s initial (stage one) anticipated results, it’s best to engage in stage-two thinking, by first asking a very simple question:

“And then what will happen?”

By asking this question again and again, you can more objectively consider what Sowell refers to as the “long-run repercussions to decisions and policies.”

If I sell out of my investments, what do I expect to happen and when/how will I get “back in”?

Realistically, you don’t know.

Investing in Stages

In investing, we see stage-one thinking in action whenever undisciplined dollars are flooding into hot holdings (yes, some of that appears to be happening now in certain investments!) or fleeing immediately risky businesses. Stage-two thinking reminds us how often the relationship between an event and the world’s response to that event is anybody’s guess and nobody’s certain bet. 

A previous Investopedia article, “Does Rainfall in Ethiopia Impact the U.S. Market?” reminds us how market pricing works: 

“No one knows how any of these events will impact markets. No one. That includes “financial advisors” who have access to complex computer models and investment strategists in the home office with cool British accents. They don’t know, but their livelihood depends upon appearing to know. Few of them are ever held accountable for the innumerable predictions they got wrong. They simply move on to the next prediction, the next tactical move.”

Avoid trying to predict future market pricing based on current market news.

Reflections on Presidential Elections

Stage-two thinking is especially handy when considering the proliferation of predictions for anything from financial ruin to unprecedented prosperity, depending on who will next occupy the Oval Office.

Again, the problem with the vast majority of these predictions is that they represent stage-one thinking. As financial author Larry Swedroe described in a US News & World Report piece, 

“Stage one thinking occurs when something bad happens, you catastrophize and assume things will continue to get worse. … Stage two thinking can help you move beyond catastrophizing. … [so you can] consider why everything may not be as bad as it seems. Think about previous similar circumstances to disprove your catastrophic fears.”

Stage-one thinking by certain pundits makes for good headlines “Sell everything!” 

And then what will happen?

Here are some stage-two thoughts to bear in mind at the current time:

•    Regardless of the outcome of the election (or how the Covid-19 pandemic evolves), there’s no telling whether the markets will move up, down or stay the same in response. By the time they do make their move, the good/bad news will already be priced in, too late to profit from or avoid.
•    In the long run, the market has moved more upward, more often than it moves downward, and it often does so dramatically and when you least expect it.
•    Moving to cash could generate potentially enormous tax bills. Worse, it would run contrary to a sensible approach, optimized to capture the market’s unpredictable returns when they occur, while minimizing the costs and manageable risks involved.

Stage-two thinking should help you recognize the folly of trying to tie your investment hopes, dreams, fears and trading decisions to one or another candidate. Politics matter – a lot – but not when it comes to second-guessing a thoughtful, well-constructed retirement plan and portfolio.

Photo thanks to Ronda Darby on Unsplash