Let’s start this article with a short experiment. Don’t worry, if you are reading this on Shabbos, no writing is necessary. The experiment consists of reading just two statements:
Statement # 1: Kamala Harris is the most consequential vice president of our generation and is the leader our country desperately needs at this time.
Statement # 2: Donald Trump was the best president of our lifetime, and we need him to get the country back on track and make America great again.
Before I lose readers to these two polarizing statements, the experiment’s purpose is simply to gauge whether either comment got your emotional juices flowing. My guess is that at least one of these statements stirred something inside you. Afterall, there is nothing more triggering than politics. People that are seemingly rational in all other aspects of life can act exactly the opposite when it comes to politics.
The reason I bring this up is that in a few short days (or weeks, depending on how long it takes to tally the votes) we will find out who will be the next president of the United States. Regardless of your political persuasion, it’s imperative to not make investment decisions based on who is in the White House. Politically charged, impulsive moves almost always cost investors dearly.
Below I have outlined a short “Dos and Don’ts” framework to help investors make prudent decisions during this election cycle.
Don’t make emotional or impulsive decisions: Before the 2008 election, I had a friend tell me that if Obama won, he would liquidate his entire portfolio and flee the country. (He did, although I think he was planning to make aliyah anyway). During the 2016 election, I had colleagues tell me they would move their clients’ money to cash if Trump won the election. Both decisions turned out to be incorrect, as the markets hit all-time highs during each of their presidencies. The same is true today, with the markets also hitting all-time highs under the Biden presidency.
Do not rush to make investment decisions based on who the new president is. Take time to digest the information. Once your strong feelings subside, you can revisit whether to adjust your portfolio. In the meantime, it’s important to remember that moving your entire portfolio to cash based on who wins is always the wrong decision.
Don’t bet on certain sectors based on who is president: Given the rhetoric of each party, investors would assume that certain industries should perform better based on who is in office. While that logic seems sound, it doesn’t always play out in the real world.
The oil and gas industry is a good example. Under a Republican administration, the “drill baby drill” mantra would lead many to believe that traditional energy companies would thrive while clean energy stocks would plummet. Interestingly, the exact opposite occurred when Trump was in office. On the flip side, under the Biden administration, oil and gas stocks boomed, while clean energy companies fell.
One’s investment thesis does not always work out neatly, no matter how logical it seems. If you intend on making portfolio adjustments based on who wins the election, don’t overhaul your whole strategy because it may not go according to plan.
Do include portfolio guardrails if you’re susceptible to making emotional decisions: Not everyone has monk-like self-control which allows them to stay totally unemotional during a presidential election. Instead of trying to suppress the desire to act, which may not always be possible, I typically recommend clients open a small “cowboy account.” This account, which should be limited to 5% or less of their investible assets, can be used to go wild on any gamble they wish. This will allow them to satisfy their urge to speculate based on political outcome while keeping their serious money insulated from imprudent decisions. In the likely scenario that the cowboy investments don’t work out, it won’t derail their finances. If things do work out, that’s great and the investor will have the satisfaction of participating in these investments.
Do have an investment rav: Many organizations establish an investment committee for proper oversight of their investments. It’s an equally important concept for individual investors, which I refer to as an “investment rav.” I do not mean a friend who you casually schmooze with at your shul kiddush. The rav should be knowledgeable and someone outside your social circle to minimize groupthink, bounce ideas off, and challenge your investment thesis. This may be your financial advisor or another unbiased individual. Simply taking the time to discuss your investments before executing them helps minimize impulsive decisions based on your own political biases.
Do keep historical context in mind: Making investment decisions with a broader context, instead of a single data point, is best practice. Therefore, understanding history is imperative when it comes to structuring a sensible portfolio.
In that vein, we can look at market experience since 1945. The best case for stocks has been a Democratic president and a split Congress. In that scenario, the S&P 500 rose approximately 16% annually. In the second-best historical result, which had a Democratic president and Republican House and Senate, the market has returned approximately 13% annually. The third best scenario is a Republican sweep, where the S&P 500 has experienced just under a 13% annual return.
Readers can come to their own conclusions based on these data. However, in my opinion, the most important statistic is this: Since the end of World War II, the S&P 500 has returned over 11.30% per year when including dividends. I try to emphasize to my clients that if they stick with their strategy over the long-term, and remain overweight in stocks, they will likely be happy with the results regardless of who is in the White House.
Do review planning opportunities: Instead of patschking with your investments during an election year, which is ill-advised, focus on the financial planning opportunities. A president has far more control over tax policy than the stock market. Having constructive conversations about wealth planning opportunities with your advisor is prudent.
In this political cycle, a key issue to address with clients is the expiration of the Tax Cuts and Jobs Act (TCJA). Under TCJA, which is set to expire at the end of next year, a single taxpayer can claim a federal estate and lifetime gift tax exemption of $13.61 million. Couples making joint gifts can double that amount. If there will be a Harris presidency, this act may not be extended, and the exemption amounts could default back to 2017 levels (adjusted for inflation). This will make the year 2025 an opportune time for ultra-high-net-worth families to develop estate and gifting strategies to get money out of their estate before 2026.
The Harris administration also suggested increasing the tax rate for families making over $400,000 a year. This proposal makes Roth IRA conversion more interesting for high-income families, where they can pay taxes in 2025 at a tax rate that may be lower than in the coming years.
If Trump wins, you may not feel the urgency to make such moves given the prospect of a more favorable tax regime. In fact, if you think a Trump administration will lower taxes, then waiting to do certain planning, like recognizing large stock gains or selling a business, may be prudent.
Do ignore the noise: Most of the news and content disseminated during an election year is nurishkite. It’s just a way for various news networks and social media influencers to get more engagement. During these emotionally challenging times your investment north star should be this mantra: “Politics and your portfolio don’t mix.” However, if you do want to make personal financial decisions in the coming months, using the above framework can help keep you out of trouble.
