The presidential election is the biggest topic in the news right now, aside from COVID-19. It can be easy to get hung up on the noise. While federal policy, party majority, and the person in the White House can hold some sway on markets, it's important to maintain focus on investment fundamentals. Managing risk and investing in stocks that are doing well, regardless of politics, are still the most important factors.
Don't lose perspective
The election isn't everything. Through time, the S&P 500 has only gone up. You want to focus on investments that carry appeal regardless of whether President Donald Trump or Democratic presidential nominee Joe Biden wins the White House.
Example: Climate change has energy stocks under the microscope. In terms of rhetoric on the issue, there is a clear distinction between the positions of Joe Biden and Donald Trump. Trying to make investment decisions within the industry based on the outcome of these two candidates is short sighted.
Another example: Do not buy an oil stock simply because you think Donald Trump will win and be a more positive presence for the traditional energy industry. Your investment choice should be based on the underlying economics. The price of commodities and consumption rates are far more indicative of how energy companies will fare. Supply and demand dictates pricing far more than the White House does. A Donald Trump win doesn't mean Chevron (NYSE:CVX) will skyrocket.
Conversely, don't buy First Solar (NASDAQ:FSLR) solely because you believe Joe Biden will win the presidency and help enact major legislation or stimulus for clean energy. If you're going to buy a green energy stock, do it because of its financial performance and potential over the long term. Any legislation or policy that helps the case is simply a cherry on top. It shouldn't be the investment thesis itself.
Don't invest in a stock because you think a candidate will make it better. That's speculation. A little speculation is required for investing, but too much can be detrimental. If you have $1,000 to invest, base decisions on what is happening regardless of politics. Think fundamentals, industry trends, economic developments.
Hedge your bets
If you're investing around the election, at least hedge your risk. Holding a largely diversified portfolio will help negate any implied or feared outcomes from the election. In other words, it's OK to play the game. Just keep it to a manageable level.
Maybe 2% to 5% of your portfolio is in places that are based on the shifting political situation. The rest is in diversified holdings that can counter your potential 5% slide. Think things like the iShares S&P 500 (NYSEMKT:IVV). This ETF can give you broad market exposure, ensuring that you have a balanced approach to the outcomes of the next four years.
Our government is a complicated system and our economy even more-so. It is important to remember that the outcome of a presidential election doesn't necessarily equate to policy implementation. There are also no guarantees that a policy will lead to meaningful economic outcomes. If in your heart, you are completely convinced that a Joe Biden presidency or a continued Donald Trump presidency is going to do wonders for some particular stock, at least hedge your risk by making it a small piece of your overall strategy.
That might seem tricky with $1,000. If you're adding $1,000 to your already established portfolio, perhaps you can be more aggressive. If however, you're investing your first $1,000 ever, it's wiser to simply invest in something safe, like an ETF.
In all, keep your eye on the prize
There are two things to remember heading into the election next week, as well as after it's over: Don't fall into the political fervor and lose sight of the fundamentals; do hedge your risk.