Why You Shouldn’t Try To Time The Market, Even During An Election Year

Every year, no matter what the market does, people ask me, “Is this a good time to invest? Should I be going more conservative because of X, Y, or Z factor?” That’s particularly true this year, with a presidential election on the horizon.

Every year, the answer is the same. Successfully leaving and reentering the market at the right times is nearly impossible, and usually ends up with investors leaving significant money on the table. This is a discussion of market timing and how you should invest your portfolio, even in times of turbulence.

Market Timing

Market timing involves moving from one asset class to another based on views. Usually, it involves moving between a stock portfolio and cash, but it can include other asset classes and market sectors. If it was possible to successfully predict when the market will go up or down, you could use that information to make massive profits.

Efficiency

Nobel Prize winner, Eugene Fama , has found that the stock market is largely efficient. This means that stock market prices incorporate and reflect all relevant data, making it nearly impossible to gain an edge by acting on your own predictions. There are some known stock market inefficiencies :

1. A diversified stock portfolio will generally beat a fixed income portfolio over time.
2. A portfolio of small company stocks will generally beat large company stocks over time.
3. Value stocks (low price compared to the company’s book value) tend to beat growth stocks (high price versus book value) over time.
4. Companies with higher profitability will beat companies with low profitability over time.

And this is all we have evidence of. If you have something you observe going on, chances are that it has already been accounted for.

Professionals Are Often Wrong

Financial analysts and portfolio managers in active portfolios generally subscribe to one of two methods of analysis: fundamental and technical analysis. Fundamental analysis focuses on individual companies and trying to select stocks that will lead to outperformance based on macroeconomic and microeconomic factors. This analysis is flawed if you believe the market is efficient, per Eugene Fama.

Technical analysis focuses on price trends and attempts to use past price movements to predict future price movements. This is flawed if you believe the stock market movements are random and unpredictable , per Princeton professor and economist, Burton Malkiel.

If you look at all mutual fund portfolio managers from July 1 st , 2004 to June 30 th , 2024, only 17% of equity and fixed income funds have outperformed their indexes. This means that the professionals aren’t even getting an edge in trying to make predictions and time the market.

Emotions And Investing

Humans are unfortunately incredibly irrational when it comes to money and trading decisions. Fear and greed can lead to actions like panic selling during downturns, overbuying during bull markets, and forgetting past mistakes.

Money Left On The Table

Another problem with trying to time the market is the fact that the best days in the market are often intermingled with some of the worst days. If you watched your portfolio at all during 2020, you may have seen an double digit drop one day followed by a double digit boost the next day. During that time, many investors panicked and took money out of the market, missing a gigantic rally.

JP Morgan tracked the performance of the S&P 500 from January 1 st , 2003 to December 30 th , 2022, and found that if you’d kept $10,000 fully invested, you’d have $64,844 at the end for an average return of 9.8%. If you just missed the 10 single best days in those 20 years, you would have $29,708 for an average return of 5.6%.

Is An Election Year Any Different?

Election years are not an exception to the rule that market timing often doesn’t work. Though presidents tend to take a lot of blame or credit depending on what happens in the stock market during their presidencies, they have limited ability to impact the stock market. If you look at S&P 500 performance throughout different presidencies, the party of the person in office matters very little. The stock market continues to trend upward regardless of the party of the president.

The Federal Reserve’s policy decisions do impact stock market performance but luckily, the Federal Reserve is a strong, credible, and independent organization that will not be impacted by the president.

What You Should Do

All the evidence suggests that you shouldn’t lose sleep worrying about news headlines and how they will impact your portfolio. You should be invested in a diversified investment portfolio consistent with your goals and tolerance for risk. If you’re not sure how to go about this, consider working with a qualified financial professional.

By Cicely Jones , Contributor