How To Invest After the Election

by Neal Frankle, CFP ®

Should you make any changes to your investment strategy after the election? In the days immediately following President Obama’s victory, the market tanked. Is that a sign of things to come? What about other investments like bonds and real estate? Are they poised to flounder or flourish? Let’s take a look.

Stock Market

Great news for President Obama; he doesn’t need to find a new place to crash. But the same can’t be said about the stock market lately. Take a look at the graph below.

after the election

This is a chart showing prices of SPY – an ETF that tracks the S&P 500. If you whip out your calculator, you’ll see that the index fell about 3.5% in the 7 days following the election. Ouchy. But before you push the “SELL” button, consider this:

The market fell about 10% in the week following President Obama’s first election. But even though the market did poorly that first week, the index was 48% higher 4 years later.

There is of course no guarantee that the next four years will duplicate that sweet performance. The point is that it makes no sense to project what is going to happen over the next four years based on what’s happened so far since the election.

At the end of the day, the market craves certainty and we don’t have a lot of certainty right now. That’s partially a result of the potential “fiscal cliff” our economy may face come January 1st 2013. (I could be wrong but I feel that the fiscal cliff will be averted and that could introduce a bit more certainty into the market. Of course, the fiscal cliff isn’t the only risk the market faces. There are potential wars, oil embargoes, European recessions and a debt crisis to consider as well.)

Here’s what is important to consider. If you invest in the stock market, you shouldn’t be doing so based on what you think is going to happen over the next 4 years. You need a much longer time-frame in order to achieve better results with your investments.
Bottom line? Stay on task with your long-term investing. Don’t get side-tracked based on short-term events.

Bonds

Bonds are probably not a good bet right now. That’s because rates are so dang low. Interest rates have almost nowhere to go other than up. When rates climb, bond prices fall. That’s how bonds work.

I have no idea what President Obama is going to do, but a great deal of debt was created during his first term. It’s very possible that this trend will continue. The greater our national debt, the more risk there is that inflation will increase. When inflation climbs interest rates usually follow. All this is bad news for bonds.

Real Estate

Ready for some cheery news? All signed point to now being a good time to own rental property. If the real estate market continues to improve, the value of your assets will increase. And if it rolls over and plays dead, more people will compete to rent your property. That’s going to drive your rental income up. Win-win for you. Sweeeeeet.

Bottom Line

There are a number of competing forces that will impact the value of your investments over the next four years. The reality is you can’t possibly predict what the outcome will be.

Right now the stock market remains uncertain. But this is no different from any other time. The market is never certain. Make sure you are using the right investment strategy that fits your financial and emotional needs and stick to it.

Bonds are a risky bet right now. But that’s been the case for some time. This would be the case regardless of who won the election.
Real estate remains an interesting proposition. Just be careful to invest in the right market. Certain areas are much more attractive than others.

If you read between the lines, you understand that I’m encouraging you to ignore the results of the election when you make your investment decisions.

Are you changing your investment strategy based of the election results? How? Why?

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