3 Common Mistakes to Avoid When Investing in an Election Year

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Election year is the moment when many investors are feeling uneasy, fearing that the results might hurt their portfolios. After all, with uncertain government priorities, policy changes, and geopolitical dynamics, it’s less likely that one can be 100% confident.

This explains why flows to money market funds have always been high during election years in the past. Money market funds are long regarded to be a safer investment option that remains yielding profits – hence why many choose them rather than stacking up cash during uncertain times.

However, moving investment funds to money markets is often regarded as too conservative due to the low yields. The fact is, it’s still much better when compared to far more serious mistakes investors make in election years, which lead to actual or perceived losses.

In this article, we’ve compiled 3 common mistakes investors made during an election year. Read on to avoid stepping on the pitfalls, else, if you find yourself engaging in any of these mistakes, there’s little to no justification to continue down that path.

How Significant is Election Year Volatility?

Before jumping right into the common mistakes investors make during election years, it’s important to understand how the US election affects the volatility of an investment portfolio.

Shortly put, the possibilities of a shift in government priorities, policy changes, and geopolitical dynamics remain unknown before election outcomes are revealed.

As a result, many investors may delay making investment decisions or hedge against potential risks associated with political dynamics. This causes significant price fluctuations in the markets, making investing during this time deemed to be risky due to the possibility of losses.

The S&P 500 composite graphs show that during election years, trends tend to go sideways and plummet, beginning in October and reaching their lowest point in November, a week before the election.

Source: Business Insider

3 Common Mistakes Investors Made in an Election Year

It’s clear by now that election years bring significant uncertainty. During these challenging times, many investors make mistakes that they once thought would be beneficial, only to expose themselves to the risk of loss.

What are the mistakes? We will cover the 3 most common ones, which are listed below:

  1. Trying to time the market

Trying to time the market is impossible, and doing so puts you at risk of losing your investments – that’s why it’s referred to as ‘the loser’s game.’

The reason why it’s impossible is because no one can predict the future. Excessively focusing on market timing may lead to panic selling when investment prices plummet due to unexpected events, the COVID-19 pandemic for example.

4 years past March 23 2020, the S&P 500 index shows that the market has delivered profits far above average – 150% in total or 25.7% annualised. This demonstrates that even a distressing event such as the COVID-19 pandemic, as well as a long-running election year, do not cause stock prices to continue to underperform.

Looking back further, the Wells Fargo Investment Institute examined the average returns of the S&P 500 index over the last 30 years, which averaged 8% annually. More unexpected events have occurred, including two wars, but the stock market has continued to thrive.

  1. Making investment decisions based on predictions

Many predictions are circulating this election year. People are debating why one candidate is more likely to win than the other. There are even dedicated prediction markets where people can gamble on which candidate will win the election.

While engaging in predictions may provide intellectual stimulation, allowing them to heavily influence your investment decisions can be biassed and ignore the fundamental principles of sound investing.

If the predictions are correct, that is great. But what if they’re wrong? You may be shocked to face reality, especially if many instrument prices fall without you diversifying your portfolio. 

  1. Cashing out investment funds

The biggest investment mistake is not investing. Though it’s tempting to cash out your investment funds during the highly volatile market in an election year, as it provides peace of mind, it still counts as a major mistake.

Why? Simply put, the funds you withdraw will be eroded by inflation, which is particularly true if The Fed decides to increase interest rates post-election. Besides, cashing out funds will prevent you from capitalising on corrections, which are seen after the election.

Ways to Avoid Election Year Mistakes

Understandably, most investors make mistakes during an election year as a natural response to fear. But investing shouldn’t be scary, as the markets have been proven to thrive despite the challenging times happening in the past.

Here’s what we recommend to ease your sense of uneasiness during the highly volatile markets that election season brings:

Realise that the volatility won’t last long

Market volatility during election years is only temporary. From 1928 to 2016, the S&P 500 index returned an average of 11.28% in election years. This demonstrates that regardless of who wins, corrections will almost always occur, except when an unprecedented event occurs and affects the economy.

Focus on the fundamentals

Investing in the fundamentals is key as it increases the likelihood that the instruments will perform well in the future, regardless of who wins and whose proposals are implemented.

After all, as investors, we should focus more on the long-term. Don’t ever let the noises occurring in an election year interfere with your investment decision.

Diversify your portfolio

Diversifying your portfolio is a wise move to keep your investments stable, particularly during the unpredictability of an election year. By spreading your investments across different assets, you create a safety net that protects against potential downturns in any instrument you have.

Stay informed on current affairs

Staying informed on current affairs, particularly those relevant to economics, is key to understanding what to expect from your portfolio. For instance, Trump’s proposals to increase tariffs on Chinese goods to 60% would affect industries relying on trade between China and the US, as this strategy may impact the profits earned and shares owned by investors

Avoid making emotional decisions

Making emotional decisions is risky during this unpredictable election year. So set your emotions aside and always assess any instrument you wish to invest in, analyse the fundamentals, and choose industries wisely to ensure sustainable growth in the long term.

Key Takeaways

Avoiding making mistakes during an election is essential to ensuring sustainable portfolio growth in the long run, it’s fair to say that we’re only human. 

Despite your best efforts to keep your portfolio stable, miscalculations or misjudgments can happen unexpectedly. That’s where UOB Kay Hian comes in, offering trading expertise through newsletter and UOB Kay Hian Telegram channel.

Later on, you can leverage the insights to confidently invest in the products of your preference by using UTrade trading platform. Get started today.

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