It seems that almost everywhere you turn there’s talk of the 2020 presidential election—and we’re still months away from the first primary votes being cast! And much of this coverage focuses on how the election will affect people’s pocketbooks, creating worry that you should act now to protect yourself and your assets. Some of our clients have reached out to ask whether they should be adjusting their financial plans today.
How politics and economics intersect
It’s understandable that people are worried about how political changes will affect their financial situation. After all, political decisions do shape the economic landscape. The 2020 election specifically poses an almost countless array of potential outcomes. Will individual taxes increase? What will happen to the estate tax? Will private health insurance be eliminated? Could trade wars intensify? But worrying about these possibilities can lead to reactive, emotional decisions, such as impulsive financial behaviors or even “analysis paralysis” and complete inaction.
Such concerns are intensified by a chorus of voices that are urging immediate action. Recently, several financial “gurus” have taken to the internet to warn people to shift their financial plan today in order to prepare for the political changes of tomorrow.
Looking beyond the headlines
Today’s heightened political rhetoric and divisiveness may be new, but these attempts to predict how an election will affect the economy are not. For example, a week before the 2018 election, the Wall Street Journal published the article, “What a Democratic House Would Mean for Your Taxes,” which ultimately advised readers to wait and see how tax laws changed. Yet headlines like these imply there’s some benefit to readers in worrying about potential outcomes. Other publications have offered more direct advice on how to prepare for political change. Before the 2012 presidential election, Forbes published an article titled, “Financial Tips During a Presidential Election Season,” which advised readers to take specific pre-emptive action. One prediction was that inflation would imminently increase so readers should shift to investments that would provide protection against rising prices. However, U.S. inflation rates actually dropped for three consecutive years following the 2012 presidential election!
Other attempts to predict financial performance based on political events include the “presidential election cycle theory,” which posits that U.S. stock markets perform weakest in the year that follows the election of a new president. Yet, recently, this prediction hasn’t held true, either. For example, in the first two years of Barack Obama’s first presidential term, the U.S. stock market performed much better than during his third year in office. And in George H.W. Bush’s first year, the market was up 25.2 percent, and the start of Bill Clinton’s first term also generated strong market performance, up by 19.9 percent.
With almost thirty years of industry experience, we are all too familiar with the warnings that people should “act now” in anticipation of political changes. The real opportunity to achieve results lies in establishing and adhering to an appropriate long-term investment strategy built on goal-focused, long-term financial planning.
Focus on what you CAN control
Of course, we recognize that politics will inform financial planning decisions, but we believe it is dangerous to make these decisions based on predictions or probabilities. Too often, people fixate on elements that are outside of their control—stock market returns, the rate of inflation, or changes to the tax code. At Truepoint, we encourage our clients to focus instead on what they can control—their individual savings rate, their discretionary spending level, the investment vehicles they choose, the way they structure their estate plans.
We use these levers to adjust to changing contexts and regulations. Therefore, rather than preparing for one specific outcome, we focus on creating flexible plans that will enable our clients to adjust to a range of scenarios.
To achieve this, we hire experts who thoroughly review and analyze current legislation. We develop plans based on today’s laws, and we keep abreast of changes so that we can dynamically adjust as needed. We cannot control the political landscape, but we can create plans that allow our clients to create a long-term strategy, regardless of changing conditions. Regardless of the outcome of the 2020 election (or the 2022 election or the 2024 election….), our process will not change, even though our specific recommendations will shift as times change.
How to stay calm amidst uncertainty
It is easy to become overwhelmed by headlines that speculate about how the upcoming election will impact personal wealth. But it is important to remember that economic policy is not set by one politician alone and that legislation is not enacted overnight. Pundits—and salespeople—are often wrong, and the only legislation that matters is the legislation that is actually passed. What’s more, even after a law is passed, it typically takes a good bit of time for the new rules to go into effect, giving sufficient opportunity to change one’s financial plans accordingly. For these reasons, we encourage clients to focus on their personal and family objectives when making their decisions, rather than on the peaks and valleys of the 24-hour news cycle.