Editor’s Note: This article was written by Kevin McHugh.
Presidential elections destroy everything they touch, or at least make them incredibly volatile.
Provocative headlines, an ongoing pandemic complete with lockdowns, and the sheer possibility of a contested election with most of the country working and still learning from home is enough to send anyone into a frenzy.
Nonetheless, we find ourselves begrudgingly participating in this ritual of panicking over the security of our money, including the retirement nesteggs held by 6 in 10 American households in possession of a retirement account.
Many, as a means of protecting their assets, are questioning whether they should withdraw their money from the market, await a crash, and then re-invest in lower stock prices. Doing so, they insist, follows the general wisdom of “buy low, sell high” found from self-help classes to business school classrooms.
This could not be further from the truth. Moving our eggs too often simply increases the risk of them breaking, especially when we don’t truly understand the meaning of “high” and “low”.
In order to prove this point, I analyzed every election year since 1972. This analysis was conducted by taking the beginning and ending price of the S&P 500 Index, starting on October 1, and calculating the average monthly return of the month prior against average monthly returns. Later, I used a similar process for the VIX to be explained further in this article.
The S&P 500 has an average decline of -0.58% in October’s before a presidential election. The average monthly return of the S&P 500 is 0.67%, meaning the market historically has increased on average every other month except the month before a presidential election when it declines.
Furthermore, the Chicago Board Options Exchange Volatility Index (VIX), which measures market volatility and overall investor confidence, has always been quite sporadic in the month before a presidential election. During this month, the VIX historically has had an average fluctuation of over 27%; whereas, the VIX’s average change over its nearly 30-year history is just over 6%.
Meanwhile, after an election, data from the U.S. Bank shows that the stock market increases at an average of 5% when a new party gains power in the White House (in this instance, a victory for Joe Biden) and 6.5% when an incumbent keeps the White House. In fact, stock market averages have steadily increased by 9.5% from 1920-2019 when adjusted for inflation.
This data shows us a lesson that 100 years of data still struggles to teach Americans: we should learn to view major events, such as elections, in the context of long term investment rather than short term volatility.
After all, research from JP Morgan shows that missing the 10 best days of trading in the past 20 years risks cutting your returns in half with 6 of the 10 best trading days occurring within 2 weeks of the 10 worst trading days.
Overall, the data paints a clear picture of the risks for attempting to time the market. It’s best instead to take the more prudent route: be consistent with your contributions and reevaluate your risks and allocations every 3-5 years.
Taking these steps will truly help mitigate some of the biggest retirement blunders as most attempts to time the market are risky and lack prudence necessary for a serious investor.
Kevin McHugh is a M.B.A. student at University of Baltimore and the founder and CEO of Bloombox. He is also SGA vice president.