The Election is over, and Donald Trump is the President-Elect. Further, the Republicans took control of both Houses. But, how does this affect my portfolio moving forward? Looking at history, it doesn't.
Elections tend to only have short-term effects on the volatility of the stock market. In the video below, it states, “The markets don’t like uncertainty, and presidential elections, by definition, add another layer of uncertainty.” The video then goes onto to point out that historically the volatility ends shortly after Election Day.
The reality is whether a Democrat of Republican is in office has little impact on the overall performance of the stock market. Tomorrow, we will have the same issues that we had yesterday, last month, and last year...issues of slow growth, low interest rates which may rise soon, and excessive indebtedness. As the video points out, the most important factors in the market valuations are not what party is in office, but other factors such as globalization, technology, demographics, the Fed and the economy, and unforeseen events such as wars and natural disasters.
As pointed out in this article called Long-Term, Really Long-Term, and What You Should Focus On, the 18% annual growth of the 1980s may not be seen again in the next 30 years. In the 1980s, valuations were low, and interest rates were high leaving room for growth. Today, we are in the exact opposite situation. Michael Batnick, who runs one of my favorite blogs, The Irrelevant Investor, states the following:
Valuations are high (although not nearly as expensive now as they were cheap then) and interest rates don’t have much space between where they currently are and zero. And given that stocks are up 260% from the bottom in 2009, it’s easy to understand why low expected returners feel this way (even though stocks are up just 66% from the 2007 highs).
In the most recent long-term period (the last thirty years) the S&P 500 has had a good, but not great run. I guess two 50% crashes lead to below average returns. And if we were to see even lower returns for the next 10 years, say 2.5% nominal, the long-term returns from 1996-2026 wouldn’t look so hot. In fact, it would produce by far the worst thirty-year return in the one-hundred years from 1926-2026, even worse than had you started investing at the top in 1929.
If this scenario were to play out, the S&P 500 will have grown at just over 6% a year (nominal) for thirty years. But even the worst thirty year period wouldn’t be such a tragedy; 6% for thirty years would produce a nearly 500% return.
To put this in perspective, an investor who invests $10,000 a year for 30 years at 6% would have approximately $850,000. Add ten more years, and that amount increases to 1.65 million dollars. That is the power of compounding at work.
I still believe stocks are the best game in town…even at 6% annual rates of return. However, I believe the that by swinging at good pitches, as Chad Cook describes in How I Invest, Part 1: Find the Sweet Spots, individual investors with the right approach can outperform the market benchmark.
In Conclusion:
In the short run, stock prices fluctuate and sometimes widely. However, as seen in the graph below, over the long haul, stocks outperform bonds and other investments by multiples. The short-term swings in the market become insignificant when compared to the overall upward movement of prices throughout history.
Market timing isn't for me. My plan remains unchanged. It is to continue saving early and often, buy solid blue chip companies that pay dividends, ride the ups and downs, and allow time and compound interest to work wonders.
Thanks. Matt.
