Trump vs. Clinton: What the election means for investors
The common perception is that business-friendly Republicans are better for the stock market, but the data show otherwise.
Republican presidential nominee Donald Trump and Democratic presidential nominee Hillary Clinton speak during the second presidential debate at Washington University in St. Louis.
John Locher/AP/File
If you鈥檙e like most people, you can鈥檛 wait for this presidential election to be over. Then your Facebook feed will finally go back to photos of kids, puppies and food. Until then, you get mudslinging.
Every election year, we鈥檙e worn out by the bickering campaigns, the endless commercials and mailers and that crazy uncle who wants to turn every family event into a debate. But politics aside, many Americans are concerned about what the next president will mean to them and their family鈥檚 financial future.
The most immediate and visible concern is how the stock market will react. Investors want to know what to do with their money depending on who wins.
Presidents and the market
The common perception is that business-friendly Republicans are better for the stock market, but the data show otherwise. According to various sources, the stock market has delivered returns of聽听补苍诲听聽percentage points higher when a Democrat is in the White House.
There鈥檚 your answer, right? If Hillary Clinton wins, go all in. If Donald Trump pulls off the upset, run for the hills. In the words of college football analyst Lee Corso, 鈥淣ot so fast, my friend.鈥�
Research consistently shows that the stock market performs better under Democrats, but this is hardly a reason to start timing the market. GOP White Houses are still positive for the market. In fact, going back to Herbert Hoover in 1929, the stock market had gains in聽seven out of 10 Republican presidential terms. Plus, correlation doesn鈥檛 necessarily prove causation. Just because returns were better under Democrats doesn鈥檛 mean it was because they were Democrats.
What not to do
So what should you do with your investment portfolio when we find out who wins? 鈥淒on鈥檛 do something, just stand there,鈥� as legendary investor John Bogle says.
聽has shown that investors who trade more frequently experience worse returns. Instead, focus on maintaining a long-term investment plan that includes proper diversification, the right amount of risk for聽聽systematic rebalancing and smart tax strategies.
Of course, that鈥檚 easier said than done. According to a聽on investment decisions and the political climate, investors often 鈥渄o something鈥� after elections, and what they do depends on their political preferences. 鈥淚ndividuals become more optimistic and perceive the markets to be less risky and more undervalued when their own party is in power,鈥� the study notes.
Buoyed by their party鈥檚 victory, investors added riskier assets, such as value and small-capitalization stocks, to their portfolios. The result was that investors who favored Democrats experienced better returns when a Democrat was in the White House, while Republican investors saw better returns with a Republican president.
These results shouldn鈥檛 be shocking, since taking on greater risk can lead to greater rewards. Data聽聽shows that from 1928 to 2015 U.S. stocks, measured by the S&P 500, earned an average annual return of 9.5%. During the same period, virtually risk-free short-term government bonds earned 3.45%. The difference 鈥� 6.05% per year on average 鈥� is known as the risk premium, the additional return that investors earned for taking on more risk. However, once adjusted for the additional risk, their returns weren鈥檛 significantly better.
Long-term plan
So investors did tend to do better when their party was in power, but they increased the level of risk in their portfolios to do so, potentially straying from their plans. The amount of risk you take on should be based on your goals and personal risk tolerance, not which political party you like better.听Any shifts in your portfolio should be based on a sound long-term financial plan.
When the election is finally over, know that the performance of your portfolio depends less on who wins and more on how you respond to who wins. By focusing on the things that you can control 鈥� maintaining discipline and a聽聽鈥� you鈥檒l be the winner this time.
聽is director of wealth management at聽聽in Redondo Beach, Calif.听Learn more about Eric on NerdWallet鈥檚聽.
This article first appeared in .听