Yahoo Finance Why Advisors Say to Stay the Course in Uncertain Times
We've all heard the story before: There's a discouraging macroeconomic event, something like weak GDP growth or a rise in unemployment. The markets price in this kind of information almost immediately, and stock prices drop.
Investors, naturally, worry as they know that even a seemingly minor economic surprise can have serious implications for their businesses, investments and retirement plans. Stock prices drop, seemingly validating their worst fears.
But there's another side to this story: markets bounce back and recoup their losses. Life goes on. History shows that investors who stay the course are rewarded for their patience, while those who panic and sell their stocks at the bottom don't have the benefit of participating in the ensuing rallies.
[Read: Alibaba Stock: Rising Star or Fragile as China?]
In every market cycle, investors experience this fear and uncertainty, sometimes so much that they make dramatic adjustments to their investment portfolios. These emotionally-driven decisions about asset allocation tend to be untimely and counter-effective, yet it's not hard to see how investors would react that way.
Those market events are critical times for advisors to remind their clients to stay focused on the long-term -- and for clients to listen.
Lessons from modern political history. One of the most tragic events in modern American political history was President John F. Kennedy's assassination on Nov. 22, 1963. The market closed on the Friday the news broke and remained closed the following Monday. The Standard & Poor's 500 index finished the week about 2.2 percent higher than where it had closed on Nov. 21. In effect, this tragedy wound up having no lasting impact on financial markets.
On Aug. 8, 1974, President Richard Nixon was forced to resign amid the Watergate scandal, saying in his resignation speech that he hoped to "have hastened the start of the process of healing which [was] so desperately needed in America." Over the summer and early fall of that year, stock markets did fall, hitting a low on Oct. 3. The markets recouped their losses by March of the following year.
Most recently, the U.K. surprised the markets by voting this year to leave the European Union, a decision with far-reaching implications for business and trade. Financial advisors and other experts generally didn't believe that the Brexit decision would have a lasting impact on the financial markets, but few anticipated the markets to bounce back as quickly as they did. Global equity markets rebounded after only two days, and have since remained stable.
Is this time different? This November, the U.S. will vote for its 45th president. UBS AG Wealth Management Americas surveyed 2,300 wealthy investors and found that most (77 percent) expect the election to be a "game changer" with a major impact on the direction of the country, and they are preparing for the worst. A quarter of high net worth investors are so concerned about the election that they are considering pulling out of the U.S. stock market entirely; another 5 percent have already done so.
Surprisingly, only one out of five investors surveyed has spoken with a financial advisor about the impact of the election.
In some ways similar to the examples above, the presidential election will have very real economic and political consequences. But despite concerns, it's highly unlikely that the outcome of the election will have a lasting impact on the financial markets.
[Read: Wall Street is Terrified of President Trump.]
Sam Stovall, chief equity strategist at S&P Capital IQ, conducted an interesting analysis. Stovall looked at all presidential elections since 1944, and found that when the S&P 500 rose during the three-month stretch from July 31 through Oct. 31, the incumbent party was re-elected 82 percent of the time. Similarly, if stocks fell during that same period, the incumbent was replaced 86 percent of the time.
While this analysis is fascinating, it shouldn't be too surprising. "We all know that prices lead fundamentals," Stovall wrote in his report. "And more times than not, S&P 500 price returns identified whether the incumbent president, or his party, was re-elected or replaced."
So in some ways, the vote will be priced in to the stock market before the election even takes place.
Additionally, policy changes happen in increments and aren't always aligned with the fiery rhetoric we hear during election seasons. We have been in a state of divided, gridlocked government for many years and that will likely continue. Even if the candidate of one's choice does not win the election, that would be unlikely to bring about an economic recession or have any kind of distinct negative impact on the earnings capabilities of U.S. companies.
What's next? When evaluating uncertain political and economic conditions, investors should ask themselves: will these conditions impact the ability of the companies I own in my portfolio to generate cash flows, pay their debt and grow?
[See: 7 Stocks to Buy for the Baby Boomer Retirement Wave.]
The answer isn't always so straightforward, but in doubt, it never hurts to talk things through with a financial advisor.
Masood Vojdani is a contributor to The Smarter Investor blog, and founder and CEO of MV Financial, an asset management firm based in Bethesda, Maryland. MV Financial provides investment and advisory services to retail and institutional clients.
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