Election workers open ballots at the Maricopa County Tabulation and Election Center in Phoenix on November 11, 2022.
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It may take until December to find out which political parties control both houses of Congress after Tuesday’s midterm elections.
But that doesn’t mean your personal investment strategy should also stay up in the air.
As uncertainty over the outcome of some key races looms, the upcoming results may not elicit big market reactions, according to Dan Egan, vice president of behavioral finance and investing at Betterment.
“We still have a sort of balanced government, which is actually something markets generally like,” Egan said.
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In a midterms note published this week, UBS also signaled that the results could be positive for the markets.
“Regardless of the end result, we envision a divided government, which increases the risks of impasse and limits legislative action,” wrote Solita Marcelli, Chief Investment Officer Americas at UBS Global Wealth Management.
“It’s generally good for the markets because it reduces political and regulatory risk,” she said.
Beware of political biases when it comes to investing
Investors who try to read in the tea leaves what control of one party or another might mean for future stock returns may be disappointed.
According to a study by Vanguard, portfolios made up of 60% stocks and 40% bonds tend to perform the same regardless of the party in power.
Yet many investors tend to suffer from biases that the other winning team or party is bad, according to Egan.
“The more partisan an individual is, the more likely they are to say, whether you’re a Democrat or a Republican, ‘Well, the stock market is going to hurt because the economy is going to hurt,'” Egan said.
This can cause those same investors to reduce the level of risk they take on, whether or not there is a genuine reason to do so, he said.
To combat these reactions, it can be helpful to compartmentalize.
“Keep in mind how little control a given set of politicians has over the stock market or the economy in general,” Egan said.
Additionally, if you eliminate investment risk in response to the results, you could miss out on the upside of the market.
The S&P 500 Index tends to beat the broad market in 12 months after a midterm election, with an average return of 16.3%, according to analysis by the American Bank.
In view of the 2024 elections
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Midterm polls — which decide Senate, House and ballot initiatives — can be good preparation for the presidential election.
“It’s the junior varsity game before the varsity game, at least in terms of thinking about what you felt and felt during the election cycle, especially when it comes to investment decisions,” Egan said.
Investors may want to start thinking now about key themes that could be affected by an election that could affect their personal finances, such as proposals to reduce state and local tax deductions, for example.
“Don’t think about the politicians; think about the politicians,” Egan said.
Moreover, it helps to plan in advance the movements you will do based on hypothetical results.
Three weeks to a month before the next election, imagine what scenarios might happen on election day and how you would change your portfolio.
Then set a reminder to review those plans in the week before the vote.
The result is that you’ll have a plan you can execute that you came up with when you were calm, Egan said.
Once the votes start rolling in, it also helps keep some distance, so you don’t get caught up in the moment.
“You’re probably better off in terms of yields and stress levels if you try to disconnect and do something other than pay attention on those days,” Egan said.
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