Midterm elections stir up a lot of emotion, and it's natural to wonder what they mean for your retirement savings. The short answer: less than most people think. Markets tend to be bumpiest before an election, not after, and over the long run, which party controls Washington has made surprisingly little difference to returns. Here are four myths we hear from clients around Durham and Chapel Hill.
Myth 1: The market reacts to who wins
Fact: The market reacts to not knowing. The shakiest stretch usually comes in the run-up to an election. Once the results are in, the uncertainty lifts, and the swings often settle down.
"The market doesn't really care about the outcome. The market just wants to know what the outcome is."
Certainty, even unwelcome certainty, lets businesses and investors make decisions. So when clients get nervous before an election, we usually tell them that what they're feeling is pre-election volatility, and it tends to pass.
Myth 2: Divided government is bad for your portfolio
Fact: Since 1945, it has made almost no difference. Over roughly 100 years of market history, the split we have now, with one party leading Congress and the other in the White House, has ranked last of the four possible combinations. But those years include the Great Depression and its recovery, which skew the averages. Since 1945, there's almost no difference in market performance no matter how the government is arranged.
That surprises a lot of people, because most of us feel our side winning is the answer. But a diversified portfolio, built around a full retirement plan, doesn't need you to guess right about politics. Over long stretches, things tend to even out.
Myth 3: Gridlock is bad for the market
Fact: In a lot of ways, the market likes gridlock. Its message to Washington is basically, "Don't do anything. Just stay out of our way." The exception is must-pass deals like the debt ceiling, where a standoff can bring real volatility.
Myth 4: Volatility means the market is crashing
Fact: Volatility just means big swings. Up one day, down the next. It's whiplash, not a crash, but that whiplash is when people are most tempted to make emotional decisions. The best defense is to prepare yourself now, and to filter what you take in. A lot of the news is built to keep you watching, not to help you decide anything.
"What does this mean to me is a better question than what is happening today."
Out of 15 stories in a day, maybe two matter to you. Unless you're about to pull all your money out tomorrow, it's okay to relax a little.
What should you do instead?
Stay the course. Whether you're excited or frustrated about the results, don't let those feelings pull you away from a plan built on long-term thinking. If the headlines are making you uneasy, check in on your plan rather than your news feed. Is the risk in your portfolio still the amount your plan needs? That's a better question than who won.
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