Saturday, October 15, 2016

Presidential Elections and the Stock Market

Source: Dimensional Fund Advisors LP.
October 2016

Next month, Americans will head to the polls to elect the next president of the United States. 

While the outcome is unknown, one thing is for certain: There will be a steady stream of opinions from pundits and prognosticators about how the election will impact the stock market. As we explain below, investors would be well‑served to avoid the temptation to make significant changes to a long‑term investment plan based upon these sorts of predictions. 

Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants. This includes expectations about the outcome and impact of elections. While unanticipated future events—surprises relative to those expectations—may trigger price changes in the future, the nature of these surprises cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. This suggests it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a presidential election. 

Exhibit 1 shows the frequency of monthly returns (expressed in 1% increments) for the S&P 500 Index from January 1926 to June 2016. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months where returns were between 1% and 2%). The blue and red horizontal lines represent months during which a presidential election was held. Red corresponds with a resulting win for the Republican Party and blue with a win for the Democratic Party. This graphic illustrates that election month returns were well within the typical range of returns, regardless of which party won the election. 

Predictions about presidential elections and the stock market often focus on which party or candidate will be “better for the market” over the long run. Exhibit 2 shows the growth of one dollar invested in the S&P 500 Index over nine decades and 15 presidencies (from Coolidge to Obama). This data does not suggest an obvious pattern of long-term stock market performance based upon which party holds the Oval Office. The key takeaway here is that over the long run, the market has provided substantial returns regardless of who controlled the executive branch.

Equity markets can help investors grow their assets, but investing is a long-term endeavor. Trying to make investment decisions based upon the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.

 Source: Dimensional Fund Advisors LP.

All expressions of opinion are subject to change. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

Diversification does not eliminate the risk of market loss. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful.

Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.

Friday, September 30, 2016

Jigsaw Puzzle

Pathways Advisory Group, Inc.
Jeff Karst, CFP®

What’s the most important piece of a jigsaw puzzle?

Some would say that you need to start with the corners.  They find all the corners and set them in their respective places.  Then build from there.  Others would suggest the corners don’t matter as much as just building the edges.  Start with any edge and build the puzzle from there.  There is a very small minority of people that would start in the middle.  You may think that’s harder but it works for them.

All of these are wrong.  The absolute most important piece of a jigsaw puzzle is…….

The picture on the box.

You could build the puzzle without it but it would be very difficult and more time consuming.  You need that picture on the box to get the “big picture” of all the pieces. 

Financial planning is like the picture on the box.  We don’t file your taxes or write your estate planning documents.  We don’t sell insurance.  We strive to help you fit all the pieces together so you can live your best financial life.  We work together to create that picture.  But, it’s still just one piece of the puzzle. 

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