From Dimensional Fund Advisors
It’s election year in the U.S. once again. Whether it's viewed as good, bad, or otherwise, it comes around every four years. While the outcome may be uncertain, one thing we can count on is that plenty of opinions and predictions will be floated in the days and months leading to the vote. In financial circles, this will inevitably include discussions of the potential impact on markets. But should elections influence long-term investment decisions?
It’s natural for investors to look for a connection between who wins the White House and which way the stock market will trend. Regardless of who wins, nearly a century’s worth of returns shows that the stock market has trended upwards. As shareholders, we are investing in companies, not a political party. Companies focus on serving their customers and growing their business, regardless of who is in the White House.
Many factors impact the stock market besides who the President is, such as changes in interest rates, technological advances, and actions of foreign leaders, just to name a few. A good way to think about it is that a president doesn’t sit in the Oval Office and run the economy. Each president serves for four to eight years, which is a relatively short period of time when it comes to investing. What is long-term is America’s ingenuity to create products and services that solve our problems. Over the decades, American innovation succeeds, no matter what politicians do.
The stock market has rewarded disciplined investors for decades, through both Democratic and Republican administrations. Making investment decisions based on the outcome of elections, or how investors think they might unfold, is unlikely to result in excess returns. On the contrary, it may lead to costly mistakes. This is why there is a strong case for investors to rely on a consistent investment plan—making a long-term plan and sticking to it.
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