Election Presents a 'Behavioral Trap' for Investors
ThinkAdvisor spoke with Morningstar's Daniel Noonan about how advisors should counsel clients as the election nears.
The upcoming presidential election will present “a behavioral trap of sorts” for investors, according to Daniel Noonan, investment writer at Morningstar Investment management. “If you’re motivated to make changes to your portfolio based on what’s happening in politics, the odds of success likely aren’t in your favor.”
Quoting Eugene Fama, the former portfolio manager said: “Your money is like a bar of soap — the more you handle it, the less you’ll have. That’s probably advice worth keeping close between now and November.”
ThinkAdvisor caught up with Noonan in mid-July to talk about the upcoming election and how advisors should be counseling clients before and after.
THINKADVISOR: Which party works in favor of investors?
NOONAN: Voters will be rooting for blue or red in November. But if you’re an investor, the vote is for purple (the color you get when you combine them together). Markets like gridlock when different branches are controlled by different parties.
How should investors resist reacting to volatility?
The simplest advice for most investors would be to ignore what’s happening in Washington, D.C.
Of course, this is easier said than done. An election season is likely to bring volatility back into markets. And it’s important for investors to understand that it’s common for that volatility to be misleading.
For example, when Trump was elected in 2016, U.S. stocks immediately sold off around 5% in the overnight trading. If you’re initial reaction was to follow that market movement and sell, it would’ve been a terrible decision. The market finished up over 1% by the time the market closed that day.
There are examples of this across the aisle.
A Trump administration was supposed to be negative for companies with large China exposure given a trade war. Apple — a company with more business in China than arguably any other U.S. company — not only did fine but thrived during this period.
A Biden administration was supposed to be bad for oil companies given a reduction in drilling privileges, and no other U.S. equity sector has done better than energy since Biden’s inauguration.
Put simply, the conventional wisdom is not always right. For investors, the bias should always be towards long-term investing.
Any post-election advice?
Brad Stevens is a front office executive for the recent NBA champion Boston Celtics. He’s one of the people responsible for putting the team together. He was recently asked after winning the NBA title what it would take to achieve the feat again next season. His response was, “Human nature will be the biggest obstacle.”
The point he was making is there will be significant pressure to tweak the roster, adjust based on what competitors are doing, and look for other creative solutions to stay on top. But he was firm in his belief that the priority should be staying consistent with their existing process.
Investors should utilize this same framework. Unless there’s a major change in your personal financial situation, the investment plan you had in January should be the same one you have come Nov. 6, the day after the election.
Any other developments that advisors should be watching?
We’re always paying attention to what’s happening and trying to improve.
Our core building blocks for managing portfolios remain the same. These include diversification, global asset allocation, keeping costs in check, and detailed manager selection.
But we stay flexible and try to be opportunistic when situations present themselves. Right now, we believe there are opportunities in other U.S. equity sectors outside of technology, small-cap stocks, and even Chinese technology stocks for those who can withstand a bit more volatility.