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Portfolio Strategy

How Will the Election Affect Your Investments?

Elections and political events aren’t likely to impact your long-term returns. Instead, focus on lowering your fees where possible, and maximizing your tax efficiency across your portfolio.

Articles by Dan Egan

By Dan Egan
Managing Director of Behavioral Finance & Investing, Betterment  |  Published: October 19, 2016

While the election may create short-term market noise, history tells us that your investments won’t notice any differences over the long term.

Rather than speculate about how markets may perform, understand which fees have the greatest negative impact on your investment returns and then take action accordingly.

History has shown that over the long term, the markets and your investments generally don’t take sides, even when it comes to an election.

If you’ve set up a goal in your Betterment account, your portfolio is designed to weather market volatility—before, during, and after the election.

We help to ensure this because we are always hard at work optimizing your portfolio and keeping it tax-efficient, too.

Market Volatility Is Short-Lived

One may reason that the sheer level of media noise that accompanies elections must somehow result in market uncertainty. Though rare, some investors even hedge their emotional portfolio against their desired candidate, to buffer their dissatisfaction in case the other side wins.

However, that thinking may be over-complicating the situation. In fact, over the years, history shows that following U.S. presidential elections, volatility generally comes to a halt once markets have priced in the results:

Stock Market Volatility Following U.S. Presidential Elections

volatility and presidential elections

Source: Vanguard, Thomson Reuters Datastream, 2016

And, there’s over a century of data that shows average annual stock returns are neck-and-neck, regardless of the political party in the White House:

Average Annual Stock Market Returns by Presidential Party from 1853 to 2015
Screen Shot 2016-10-18 at 2.01.00 PM

Source: Vanguard global financial data 1853 to 1926, Morningstar and Ibbotson through 2015

Focus on Fees (Which Are Known), and Not Returns (Which Aren’t)

In a recent article by Meb Faber, he compared the current election cycle to picking between two deadly animals, a shark or lion.

He argued, however, that neither sharks nor lions actually kill many humans on average per year, and that the real predators are mosquitos, which are responsible for more than half a million human deaths per year.

And the investment equivalent of mosquitos, Faber argued? Fees.

It’s true. Rather than trying to predict whether the market will go up or down over the next two months, you should be focused on what fees you are being charged by your various fund providers. Remember that holding assets with multiple investment providers does not alone equate to a strongly diversified portfolio.

For customers who sync their outside accounts with Betterment, you can see just how much your non-Betterment accounts are charging you in fees—which can include fund management, administration, and 12b-1 fees. These fees add up and are a real performance-killer, so finding out which funds are costing you the most can help you stay focused on what’s important in the long term and take action accordingly.

We’ll Help You Stay the Course

For this election cycle and every one after, Betterment helps you stay the course. Our goal-based investing philosophy keeps you on track so that you can progress toward your desired goal by the end of a certain time horizon, major elections included.

In addition to helping you monitor for high fees, we offer the following tools to maximize your returns for tax efficiency. Even if markets gyrate, here’s what we’ll be doing to help keep you on track:

  • Automatic Rebalancing: Asset allocations can drift away from their target level during periods of heightened volatility. Betterment monitors your portfolio daily and assesses if your allocation has drifted significantly from its targets. We’ll rebalance when your drift exceeds our thresholds, and we’ll do so in a tax-efficient way in your taxable accounts.
  • Tax Loss Harvesting+: Volatility often means more opportunities to harvest tax losses. If you have Tax Loss Harvesting+ enabled in your Betterment account, we will monitor your portfolio daily for these opportunities, and harvest losses when appropriate.
  • Tax-Coordinated Portfolio™: With Tax-Coordinated Portfolio, Betterment automates an investment strategy known as asset location. We’ll help ensure that your account earns higher after-tax returns in retirement, by managing multiple accounts as a single portfolio and placing assets that are taxed more into more favorably taxed accounts (like IRAs).

While short-term market movements may come in the wake of major political events, rest assured that while they may seem like a big deal to you as they happen, your investments don’t share these emotions and won’t be derailed from achieving long-term performance.

But if a drawdown does knock you off track, we’ll help you get back on it. It’s a good time to check your savings rate and rebalance with a deposit. You can check if you’re still on track on the Advice tab in your Betterment account.

Regardless of who ends up losing the election, we believe patient investors who stay the course will win over the long term.

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