Thinking of Dumping it All?

Emotional or Logical Decisions Post Election?

I made some changes to my investments yesterday. Yes, I know the election is today. No, it did not have one ounce of influence in what I did or why I did it. There was nothing really special about yesterday other than the fact that it was the first trading day of a new month and that is when I assess my long-term portfolio (the one that I am not going to touch until much further in the future). In fact there is nothing special about the first day of the month other than that is the day that I decided I would use to make assessments and changes if need be. The decisions and the actions that I made yesterday were purely unemotional and they were not made on a whim or because I saw some polling data over the weekend. The actions that I took yesterday were made because of decisions that I made years ago. I will outline how I came to those decisions (years ago) some other time but let’s just say it is rooted in my own research and the work of other investors who I respect.

No, the point today is to highlight that the actions yesterday were completely unemotional. They were based on rules that I follow strictly because I think that following them is the best way for me to meet my goals in the future. In an ideal world, when it comes to investments, we would all be robots. We would not let emotions drive the decisions that we make. What we do and how we invest would be a function of our time frame, goals and tolerance for risk. From there the strategy would be grounded in research that has some economical underpinning. For instance, you may notice that TSLA stock goes up every time a Tesla car drives by, but I wouldn’t build an investment strategy around that.

But, we don’t live in an ideal world. Without a doubt emotions will be running hot for some people tonight and in the days / weeks ahead. Regardless of the outcome, about half the people in this country are going to be upset, mad, bewildered or some combination of all three. But should that be a reason to make meaningful changes to investment plans and strategies. I am going to argue no…if your plan is long-term in nature. If you are trading in the short-term, the prospects for volatility should excite you. But for now, I am focused on the long-term.

I really liked this post from Nick Maggiulli. Nick looks at the markets through the lens of a data scientist. He talks about how the lead up to the election is often volatile but if you zoom out and take a longer view, doing nothing may be the best bet:

While it’s clear that presidential elections tend to have some impact on market performance in the short run, whether you should do anything about them is another matter entirely.  After all, why would you make adjustments to your portfolio based on the outcome of a single election when you have decades of investing ahead of you?

Of course presidents can affect markets over the long run through policy changes, but what’s the likelihood that those policy changes will prevent you from reaching your financial goals?  Slim to none. 

Or, how about this comment from my friend Andrew who is a CMT, like myself. Notice the words timeframe and strategy.

Here is an exercise that is not completely realistic but proves a point. In 2016, it was assumed by many that President Trump would not be good for the market. In fact, on election night the market actually tanked and then quickly rebounded. Putting that aside, let’s assume that a person who did not like Donald Trump decided to make the emotional decision to sell all of their stock and move it to cash. Let’s also assume that because “Donald Trump is the President” was the sole basis for making this decision, today on November 3, 2020 that person is still sitting in cash.

The S&P 500 opened on November 9, 2016 at 2,131. It closed yesterday at 3,310. That’s a return of ~55%. On an annual basis, that works out to ~11.63% per year. How much did that “cash” earn per year over the same time frame?

This person missed all of that return simply by making an emotional decision. Did this help or hinder in reaching his / her long-term goals? From a financial stand point is this person better off or worse off today. I know there are many other variables that impact the answers to these questions but I hope my point is coming through.

One last point, there have been bull market cycles and bear market cycles under both democrat and republican presidents. For the long run, the focus should be on what matters…tonight probably isn’t in that bucket. So if the thought of (insert the name of the person you don’t want to win here) in the Oval Office makes you want to dump it all, before you do, ask “Is this Emotional or Logical?”

Please consider sharing this note with anyone you think may find it interesting.