How to manage your risk amid election uncertainty

Timothy Breitfelder

Uncertainty in the markets is a hallmark of election years and is a significant worry for many investors.

The barrage of commercials and opinion coverage about the candidates often adds to the uncertainty and stokes fears about the potential outcomes.

Fear and uncertainty can cause heightened market volatility in election years, which can lead to investors keeping money on the sidelines rather than putting it into the market.

It is true that government has a hand in creating winners and losers in both society and in the markets as a result of tax policy, regulations and fiscal spending. So, when political candidates offer extremely diverse policy positions, what is an investor to do?

Be Diversified

This is beneficial for helping reduce risk in normal times and is even more important leading up to the election.

Individual candidates and political parties will have different policy goals that could have a significant impact on one industry vs. another. History has shown the presidential outcome to have little effect on the overall market outcome during the four years in office.

The makeup of Congress is of greater importance in getting laws enacted, and it is impossible to know with any certainty what Congress will look like at this point.

Therefore, being diversified leading up to the election helps limit the chance that a portfolio will be overly focused in an area negatively impacted by a new administration.

Reconfirm Your Individual Portfolio Objectives

Many investors have different portfolios for different objectives, such as long-term retirement or a short-term car purchase.

Although historically there are no significant differences in performance during the entire four years of a presidential term, there are differences in market performance by year.

Portfolios with long-term goals should be diversified with a risk tolerance appropriate for a long time horizon and rebalanced periodically. This helps a portfolio to weather year by year volatility.

Portfolios designated for a shorter-term need, such as a car purchase, should be more conservatively invested in the event of a negative market outcome.

Re-evaluate Asset Allocation after the Election

Once the election outcome is known, the administration’s policy objectives will become clearer and the anticipated impacts to various industry or market sectors will become more visible.

Investment strategy might need to be adjusted toward industries or sectors with a more favorable outlook, while maintaining overall diversification.

It is important to remember that many factors affect the market over time. The interest rate and inflationary environment that is managed by the Federal Reserve also has a significant impact on the economy and the markets. Market analysts will be diligently working during the next few months to analyze the policy proposals of each candidate to help determine the impacts to the economy and, thus, the markets.

A president can set a strong direction, but he or she needs Congress to enact the laws. All 435 seats for the U.S. House of Representatives and 35 of the 100 U.S. Senate seats are up for election. The outcome of those elections is impossible to know, therefore setting an investment strategy today based on the perceived election outcome can be dangerous.

Markets don’t like uncertainty, so Election Day results will help bring the clarity the markets are looking for. The work done by analysts in analyzing the potential outcomes will be valuable after the election for determining how to adjust portfolios. In the meantime, focus on the three tips to help manage your risk.

The views expressed here reflect the views of Breitfelder as of Aug. 14, 2020. These views may change as market or other conditions change. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.

Diversification helps you spread risk throughout your portfolio, so investments that do poorly might be balanced by others that do relatively better. Diversification does not assure a profit and does not protect against loss in declining markets.