Presidents may come and go, yet markets endure. Guy Beck explains why sticking to the investment philosophy is the route to success.
2024 was truly the year of elections. It was forecasted that more voters than ever, across 64 countries, would head to the polls to cast their votes on the future leadership of their nations.
The Presidential election in the US, as a significant global power and a dominant exposure in investors’ portfolios, naturally gathered a lot of attention. Donald Trump’s victory saw him not only claim the White House but the coveted trifecta – the presidency, plus both chambers of Congress (the House and the Senate).
The US president is often considered one of the world’s most powerful figures, wielding substantial influence over the world’s largest economy and one of its most formidable militaries, albeit limited by a system of checks and balances through Congress.
Perhaps it is understandable that the media, politicians, celebrities and business owners alike make such a noise during the campaign.
For investors, it is natural at times of political uncertainty to wonder whether they ought to act, perhaps altering their portfolio to position for a specific outcome, or to move money into cash deposits until things ‘settle down’.
Some choose to invest this way, mostly at their peril, as very few managers possess the ability to consistently predict such events.
A better strategy, as is adopted in prudent portfolios, is to outsource this guesswork to the market itself, relying on the millions of daily participants to come up with their expectations and reflect them in prices.
Thankfully, given both democrats and republicans support capitalism and believe in personal freedom and property rights, this strategy is a tried-and-tested approach to investing.
If we look at the global equity market return over the past century or so, we can see that both republican and democratic parties have resided over some fantastic periods, and some not so fantastic ones.
However, the ability of capitalism to create wealth despite the ups and downs is evident, with $1 invested in 1926 becoming nearly $10,000 by 2024.
The challenge is that it is not enough to know what the outcome of an election will be, one also needs to know – without the benefit of hindsight – how the market will react once the event occurs. In reality, it is just guesswork.
While guessing against randomness is impossible, taking on the known risk that equity returns are far less certain than holding cash rewards investors who ignore this short-term noise and focus on the long-term. The choice of the US President is important to some, but to the long-term investor it is largely irrelevant.
An important tool at such times of market activity is diversification – that is, spreading eggs across baskets. Ensuring that diversification is not only achieved across countries but also within them is key.
Different areas of the market perform strongly at different times – unfortunately there is no way of knowing which will be next, in advance. In the US, the past decade has been dominated by large tech-based stocks. The next decade may be entirely different. Or it may not.
The ‘lost decade’ of 2000-2009 highlights this point well, known as a time where the US stock market delivered little back to investors. It saw the S&P 500 (a stock market index which tracks the performance of the 500 biggest listed companies in the US) deliver a period of negative returns, the Dot-Com Crash of the early 00s, followed by the Global Financial Crisis.
But it was not all doom and gloom. Those driven to omit large US companies from their portfolio on the basis of this poor performance would have missed out on the strong performance that has come to pass since.
No-one truly knows what the future holds. Keeping focused on the long-term, remaining diversified and having consistent exposure within each region continues to be the best line of defence – and provides the best opportunity – for whatever lies ahead.
Guy Beck is a senior financial planner with Cavendish Medical, specialist financial planners helping consultants in private practice and the NHS.
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The content of this article is for information only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.
