Election Day is drawing near. As a citizen, you'll want to cast your ballot for those candidates who best represent your views on a range of important issues. But as an investor, you might be wondering how the election's outcome might affect one specific area -- your financial outlook.
There's no simple answer, of course. But a look back in time does reveal some points of interest. Most notably, the stock market and the economy have performed well, on average, under every combination of Democrats and Republicans in Washington. But there are differences -- specifically, the economy has historically grown faster under Democratic presidents and when Democrats had the majority in Congress. On the other hand, inflation has historically been lower during Republican presidencies and congressional majorities, resulting in improved performance for the bond market.
Still, these tendencies don't necessarily have predictive power. Furthermore, when assessing the long-term effect on investment prices, there's strong evidence that market forces -- such as corporate earnings, consumer spending and interest rates -- are more important than politics or elections.
Consequently, you'll want to stay current on these market forces as you monitor your investment strategy over time.
But wait -- won't your tax situation change, based on who wins the election? Specifically, won't there be changes related to how your investment earnings are taxed?
At this stage, it's hard to predict what these changes might look like, if they happen at all. Keep in mind that the next president, no matter who he is, will need to get his plan through Congress, so whatever emerges in the way of tax changes may look considerably different than what either candidate proposes.
That's also the case for other policy changes, and it's one of the main reasons that you shouldn't "play politics" with your investment portfolio. It's difficult to guess what will happen to policy -- and the consequences are frequently different than intended.
Ultimately, your investment success will depend less on the decisions made by a president or Congress and more on the decisions that you make. So, instead of thinking about what the financial markets might do if one party is in power, or focusing too much on how your investment taxes may change if one candidate is elected president, cast your "vote" for solid investment principles, such as buying quality investments, holding them for the long term, staying aware of your risk tolerance and, especially, diversifying your holdings. While diversification can't guarantee profits or prevent losses, it can help reduce the effects of volatility on your portfolio -- which will make it easier to establish a strategy and stick to it.
Like many people, you'll be interested in the outcome of the election. But when it comes to taking charge of your financial future, don't wait for Washington. You're in charge -- you're the one who will need to gather the resources and get the professional help necessary to keep your investments aligned with your long-term financial goals. Don't be distracted by the political rhetoric -- and use your power wisely.
This article was written by Edward Jones and submitted by Wil Pena, a financial adviser in Islamorada.