I don't think anyone doubts the fact that we are a polarized country. The difference in our political views is having a dramatic effect on investor behavior, with Democrats and Republicans taking very different approaches to their portfolios.
One client sent me a blistering e-mail the day after the election. He directed me to sell all his stocks. He referred to President Obama as a "manchurian president" and stated that the economic model of this country portends "financial suicide." Others expressed the same sentiments in less colorful terms, but with equal passion. They have issues not just with this country but also with the balance of the world. They are concerned about the fiscal cliff, a dysfunctional Congress, a President in whom they have no faith, higher taxes, and the burden of Obamacare.
Should you dump your stocks and "sit on the sidelines" in order to preserve your assets? If you do, you are making a critical assumption: You believe stocks are overpriced and will likely decline in the future. You might be right or wrong, but I don't believe this is a sound basis for making important investing decisions.
Every day, five million investors buy and sell stocks. In setting the price of the stocks being bought and sold, these investors take into account all publicly available information about economic uncertainty, and all other factors. Think about this: There are 10 million traders every day buying and selling the stocks of 20,000 companies on 100 stock exchanges every day. What is it you know that these traders don't? They are looking at the same data that is concerning you and setting a price for stocks at which they are willing to buy or sell. Do you think this process results in prices that are not "fair"?
Of course, just because prices are fair today, doesn't mean they will not rise or fall tomorrow or over time. But the cause of future changes in the price of stocks will be tomorrow's news. It could be news that affects the market as a whole (like a default on sovereign debt) or news relating only to a particular stock (like the death of a Chief Executive Officer). No one knows tomorrow's news. Investing based on a prediction about tomorrow's news is speculation.
There are good reasons for lessening your exposure to stocks. Your time horizon is a critical factor. You should not be invested 100 percent in stocks unless you have a minimum of 15 years before you will need to withdraw 20 percent or more of your invested funds. A change in your tolerance for risk is another. While greater exposure to stocks means higher expected returns, it subjects you to increased short-term volatility. In 2008, portfolios of 100 percent stocks lost 40 percent or more of their value. If you can't tolerate this kind of volatility, you should not have a high exposure to stocks in your portfolio.
Instead of relying on your (or anyone's) prediction about future news events, you should focus on your asset allocation (the division of your portfolio between stocks and bonds), and consider investing in a globally diversified portfolio of low management fee and tax-efficient index funds.
There may be sound reasons to dump stocks. The presidential election is not one of them.
Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own, and The Smartest Money Book You'll Ever Read.
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