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2024 is certainly shaping up to be a busy year for elections. The Associated Press reveals that more than 50 countries, representing over half the world’s population, are holding elections at some point this year.
Two particularly relevant events for you could be the UK general election, held on 4 July, and the US presidential election, occurring on 5 November.
Naturally, you might be concerned about how these elections could affect the performance of your investments. After all, a potential change in government does introduce an element of uncertainty, sometimes resulting in market volatility.
However, it’s wise to keep a cool head, regardless of the outcome – continue reading to discover why.
Markets typically don’t like uncertainty
The phrase “markets hate uncertainty” is often bandied around during election seasons, and there is perhaps some truth to this.
Uncertainty can cause volatility, which can further fuel investor anxiety and a lack of confidence in the market. This volatility often stems from investor apprehension about potential policy changes that could affect specific sectors.
Though, it’s vital to remember that this change can also breed new opportunity. Some investors and markets might actually be enthusiastic about fresh ideas and policies.
Of course, predicting exactly how markets will react to elections is difficult, as past performance isn’t a reliable indicator of future returns. Still, historical data can offer some invaluable insights.
For instance, the Times Money Mentor reveals that the average return for the FTSE All-Share index since 1962 in the year running up to an election has been 8.9%. In the following year, the index returned 6.9% on average.
Interestingly, there seems to be a notable difference in performance immediately after an election, depending on whether an incumbent party wins or not.
Indeed, the FTSE All-Share returned just 0.9% on average in the year after an incumbent government was re-elected, compared to 12.8% when a new government came into power.
As for US markets, the Dow Jones Industrial Average has returned an average of 5.4% during presidential election years since 1949. However, this average jumps to:
7.2% in the first year of a new presidency
8.4% in the second
12.6% in the third.
These figures demonstrate that market performance can indeed vary during and after an election. Regardless, it’s of the utmost importance to stay calm and collected – read on to discover why this is the case.
Keep calm and don’t make any knee-jerk decisions
No matter the outcome of the elections, it may be wise to avoid making any short-term decisions based on current events.
Even if the elections do prompt sudden market fluctuations, they’re unlikely to permanently affect your long-term financial security.
This is because markets have a historical tendency to recover over time, as this graph, which shows some momentous events that affected global stock market returns since 1988, demonstrates:
As you can see, while each event did affect the markets considerably, the overall trend remained upward over time.
This underscores the importance of investing with a long-term perspective, ideally five years or more.
By doing so, you could give your wealth the chance it needs to ride out periods of volatility and uncertainty and recover over time, whether triggered by an election or other events.
It’s also worth remembering that many emotional biases exist that could cloud your judgment during an election season.
For instance, “loss aversion” is the tendency to feel the pain of loss twice as strongly as the pleasure of an equivalent gain. This could lead you to make decisions solely to avoid losses, potentially causing you to miss out on opportunities for growth.
“Recency bias” is another potential emotional pitfall. This is when you make important decisions based on recent events, particularly negative ones. In relation to the election, you might focus on how previous votes have affected investments instead of adopting a positive outlook for the future, leading you to become overly risk-averse.
To prevent emotional biases from affecting your investment growth, it might be wise to limit your exposure to financial and political news around the elections. This could help you avoid unnecessary worry that might lead you to panic-sell investments.
Adequate diversification could also help
If you invest solely in one sector, asset class, or geographical area, you might inadvertently increase your exposure to risk and potentially limit your opportunities for growth.
This is because if a specific sector or asset class experiences a period of downturn, and that’s all you’ve invested in, your entire portfolio could suffer.
Conversely, by allocating your wealth across various asset classes and regions, gains from elsewhere could offset your losses from other investments.
Consider this asset quilt, which shows the performance of various stock market indices from around the world:
Source: JP Morgan
The varying performances of different markets worldwide highlight how solely investing in one region could cause you to miss out on potential growth elsewhere.
While short-term fluctuations aren’t exactly indicative of long-term trends, adopting a diversified investment approach, particularly during election season, could ensure that your wealth is adequately spread out.
In this instance, if a particular market experiences election-related volatility, your investments in other areas could potentially offset these losses.
For example, if the general election results in a hung parliament and you’re over-exposed to UK markets, this could significantly affect your portfolio in the short term. But, if you have wealth invested elsewhere around the world, gains in these assets could offset the dips in value of your UK holdings.
Diversification can offer peace of mind, as seeing the overall value of your portfolio fluctuate can be unnerving.
With a well-diversified portfolio, you could weather these periods of uncertainty with less worry, knowing that losses in one area could be balanced by gains in another.
Get in touch
If you’re still concerned about how your investments might perform as a result of the elections this year, we could act as an invaluable sounding board to ensure you don’t make any decisions based on short-term volatility or emotional biases.
Email info@athertonyork.co.uk or call us on 0208 882 2979 to find out how we can help.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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