Yahoo Finance Trump vs. Biden: Why You Shouldn’t Change Your Investment Plan Based on Who Wins
It seems more and more likely that we’re heading for a Donald Trump vs. Joe Biden election again this year. While the outcome can affect many aspects of American life, you probably shouldn’t base your financial planning on whether or not your candidate of choice comes out victorious. However, doing so has become increasingly common.
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“This sort of political polarization and how it affects our beliefs about the stock market has been around in America for a long time, but it actually has gotten worse in the last two to three decades,” said Dan Egan, behavioral finance expert at Betterment. “It correlates to a large degree with polarization amongst news sources, and how people think about things. It’s gotten a little bit more where we very strongly bifurcate into one camp or another. And that’s reinforced to ‘all good’ or ‘all bad.'”
While this mindset has become the norm, Egan outlines a few reasons why you should not change your investing or retirement plan based on who wins the upcoming presidential election.
Perceived Changes in the Economy Are Often the Result of Confirmation Bias
The belief that the economy performs better under certain presidents is just a belief, not a fact, Egan said.
“It’s become an all-or-nothing viewpoint — everything will be great based upon whether or not a candidate wins,” he said. “This is more just a change in how we perceive things based on confirmation bias — avoiding things that disconfirm your beliefs about something and looking for things that confirm it.”
Historically, the stock market has not been significantly affected by who the president is.
“People are more polarized and they believe that presidents have more influence over the stock market than they actually do,” Egan said. “That is something that’s become more of an issue. There’s a little bit of emotional leakage from one topic to another, where if you feel strongly about something that seems very important to you — it might be voting rights, immigration, whatever the topic happens to be — it’s very easy to have that pour over into, it would be bad for something like the stock market too.”
Why You Shouldn’t Change Your Investment Strategy
If you’re considering changing your investment plan based on the outcome of the presidential election, this would be a mistake, Egan said.
“There is nowhere near enough of a strong signal about one party that says your investment strategy should take this as a real indicator of how risky you should invest,” he said.”In all cases, [whether the president is] a Democrat or Republican, stock markets go up on average.”
If you decrease your investments or pull out of the market because your preferred candidate didn’t win, this will likely cause you to miss out on potential games.
“You’ll miss out on positive expected returns because [the market] does go up on average,” Egan said. “There’s just so much stuff that goes into the stock market that is completely outside of our president’s control.”
Even policies that are within a president’s control might not affect the stock market as you would expect.
“Sometimes it can be very counterintuitive,” Egan said. “For instance, one of the things that gets people’s heads wrapped up is that if we go to war, it feels like a bad thing. Perversely, it can be good for the stock market because it means there’s going to be increased government demand for various services and stock prices tend to go up.”
Best Money Moves To Make During a Trump or Biden Presidency
According to Egan, the best money moves you can make will hold true during either a Trump or Biden presidency.
“There’s not a tremendous amount that they can do in just four years to really change things, so make financial decisions [based on] your own personal life,” he said. “Think about when you’re going to retire — can you work an extra year, can you take an extra year off? Am I putting money into a 529 for my kids? These are all very high-leverage, high-return decisions that you can put a little bit of effort into, and it’s almost guaranteed to pay off.
“Trying to decide, how should I invest, based on who’s the president is so far away from a leverage point,” Egan continued. “Focus on things closer to home, like maxing out your 401(k) — especially if you have a match, making sure that you have an emergency fund, and looking into 529 plans for your kids’ college education.”
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This article originally appeared on GOBankingRates.com: Trump vs. Biden: Why You Shouldn’t Change Your Investment Plan Based on Who Wins
