Preparing for Financial Fallout During Elections
Elections can be an emotional time, and the 2020 U.S. presidential election promises to be no different. Politics can bring out strong emotions and biases, and investors want to know what can be done to prepare for financial fallout during this time.
Since it is unknowable who will win in November and polls have proven to be inaccurate and unreliable, preparing portfolios for election outcomes is nearly impossible.
In fact, all events that have had an impact on the markets have been a surprise, and election outcomes are no different.
This is axiomatic in that if the opportunity was known and clear, the markets would immediately react to it. Accordingly, barring the possession of insider information or advance notice of an event, it is impossible (and dangerous) to position portfolios for outcomes that might not materialize. In 2016, whiz kids on both sides of the political spectrum predicted disaster, as they are now, if the opposing candidate took the Presidency. Investing based on these predictions would have been a big gamble. This is not a variable on which we will base our investment policy.
Instead, we prepare and protect portfolios by remaining broadly diversified at all times.
We own all four asset classes all of the time, no matter how stinky they are. Since stocks, bonds, cash, and hard assets tend to react differently to ‘events that move the markets up or down, a portfolio consisting of some combination of all four asset classes has historically produced a remarkably boring outcome: Long-term returns that are pretty good most of the time, in general, with less upside and less downside when compared to the broad markets.
Our role in this process has three components:
- Selecting an asset class allocation with you based on your risk and return parameters.
- Selecting managers that have demonstrated the ability to find attractive investments in those asset classes and monitoring the performance of those managers.
- Making allocation changes based on relative values between asset classes and rebalancing accordingly.
We regularly discuss conditions and outlooks with our portfolio managers, who are great information resources for us, and they generally are of the same mind: Predictions are difficult, especially about the future (with ascriptions to Mark Twain and Yogi Berra). While we assist clients in selecting an allocation among the four asset classes based on their risk-return parameters, our managers’ role is to pick companies that they believe should do well in most, if not all, environments irrespective of the political outcomes. To be fair, this does require some ‘predicting’, but with greater granularity. When selecting managers, we look for those with a record of selecting all-weather companies that can do well in a variety of environments.
The Bottom Line
We control risk mostly through asset allocation with fine-tuning through manager selection and rebalancing. Of course, this does not eliminate risk and won’t produce great outcomes all of the time, but based on a lot of experience and research, “pretty good most of the time” should be a long-term investor’s goal.
If you should have any questions regarding this topic, please do not hesitate to reach out to your advisor or contact our team.