10 Reasons to Stay Invested Through the Presidential Election

Wall Street gets very nervous in advance of presidential elections. On both sides, investors worry that the other party will win and tank the markets in its wake. And this year, emotions are running hotter than ever, thanks to massive unemployment, a political standoff on stimulus programs, and a pandemic that's now in its third wave. In these troubled times, it's perfectly human to feel the urge to move into cash.

Unfortunately, selling out before the election, or even just after, is likely to work against you -- ultimately making it harder to reach your wealth goals. Here are 10 reasons why now is the time to stay the course with your investment plan.

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Since 1927, the stock market has returned about 10% annually including dividends, without adjusting for inflation. That positive average growth of 10% includes four consecutive years of double-digit declines between 1929 and 1932, as well as annual pullbacks in excess of 20% in 1974, 2002, and 2008.

In the history of the U.S. stock market, the good years have always outshone the bad ones. If there is trouble ahead related to the outcome of the U.S. presidential election, know that it will be temporary. A recovery may happen fast or slow -- but it will happen. And when it does, you want to be there, ready to ride the upswing.

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Buy-and-hold investing is arguably the simplest and lowest-risk approach for building wealth over the long term. It's the strategy of choice for Berkshire Hathaway CEO Warren Buffett, Vanguard founder John Bogle, and other legendary investors.

A key principle of buy-and-hold is that short-term market conditions should not drive your investing decisions. That includes market volatility related to presidential elections, economic downturns, global pandemics, and the like. You'd sell a position because it no longer suits your goals or risk tolerance, but not because the market's gone haywire.

If you're happy with the quality of your portfolio, don't let election jitters push you into selling. Instead, wait for the storm to pass.

In the last week of October, several national polls indicate that Democratic candidate Joe Biden has an established lead over the Republican incumbent, President Donald Trump. An outlier poll, Rasmussen Reports' daily White House Watch, however, gave Trump a 1-point lead over Biden less than a week before Election Day. Notably, the same report in 2016 showed a tie between Trump and Hillary Clinton on the final Friday before the vote.

The point is, there's no way to know who will win this election. The polls are the best barometer, and they've been fallible. You can hope, guess, or predict, but you can't know. And that means it's far too risky to bet your finances on the outcome.

Republican presidents are better for the stock market. Everyone knows that. Right? Actually, no. Data shows that the stock market performs well under most presidents.

An analysis done by investment advisor McLean Asset Management shows that the market is more affected by whether the presidency and Congress are controlled by a single party. The annual returns of the S&P 500 average over 15% when either party is fully in control or when a Democratic president is governing with a Republican Congress. But when a Republican president is coupled with a Democratic Congress, the returns are lower, at about 7%.

There's one outlier, but all of those averages are positive. Even if you could predict the election's outcome, historic numbers point to gains no matter which political party takes the reins in D.C.

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The ground you'll lose by stepping out of the market depends on how much you had invested and the size of your ongoing contributions. Here are some numbers to consider.

In the year following a presidential election, the stock market grows an average of 9.6% when the incumbent president wins, or 4.8% if that incumbent loses. Say you have $100,000 invested and you make monthly contributions of $500 monthly. At a growth rate of 9.6%, you'd have $116,355 after a year. If the growth is 4.8%, you'd have $111,065. In other words, the decision to pull out of the market could cost you $11,000 to $16,000.

That's a sizable setback, particularly if you have decades between now and retirement. If you stay invested and add just $10,000 to your balance as a result, just that amount can grow to $40,000 in 20 years, assuming a 7% return.

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We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

You're not going to stay out of the market forever. Unfortunately, when you sell, you give yourself the responsibility of timing your return. And that's where so many investors get into trouble. The normal response is to wait until you feel comfortable or see the right signs of stability -- like an extended period of market gains. You can understand the problem there. When you watch for those gains from the outside, you aren't participating in them.

By simply staying in the market, you eliminate the possibility of mistiming not only your exit but also your reentry.

If you can learn to resist the urge to make predictive decisions, your life as an investor and saver will be far simpler and less stressful. You won't have the stress that precedes or follows a decision you've made based on incomplete information, including what might happen after an election. In that mindset, you recognize that market turbulence today or next year is part of the wealth-building process. It's a trade-off you accept because equities offer long-term growth rates that are many times higher than what you'd earn with cash deposits.

You can live your life without compulsively consuming financial headlines or waiting for a sign to point you to your next move. Use this election to start practicing that approach. You'll make fewer decisions and probably build your wealth faster as a result.

ALSO READ: These 3 Stocks Are Buys No Matter What Happens in the 2020 Election

Here's another perspective that'll make you a happier investor: Market volatility is a good thing, because it creates opportunity. When the share prices dip, that's your chance to expand your portfolio at a lower buy-in cost. If you're willing to invest more during turbulent times, you'll do well in the upswing that follows. Reliable dividend payers are particularly attractive in those downturns, because they offer an income stream that can placate you until the market recovers. You can also reinvest those dividends to grow your share count efficiently along the way.

Growth years in the stock market are more common than loss years. Specifically, the stock market had positive performance in 76% of calendar years between 1937 and 2019. The average total returns in those positive years was nearly 20%.

Now, consider this. If you had invested $10,000 in the S&P 500 on Jan. 2, 1990, your money would have grown to $172,137 by the end of 2019 -- assuming you stayed in the market. But if you'd moved in and out of the market and missed the top 10 performing days, your balance at the end of 2019 would be 50% lower at $85,907.

The takeaway? Although it may feel counterintuitive, staying invested through uncertain times is actually the safer bet.

Underlying all of these reasons to stay invested through this presidential election is this: When you're building wealth, the stock market is your best choice. If you can keep your money invested for 10 years or more, you have a good chance at inflation-adjusted annual gains of 6% to 8%.

Compare that with what you'll earn in a high-yield savings account. The going rates are 0.7% to 1%. Adjust that for inflation of 1.37% and you're actually losing purchasing power. Plus, that dynamic between cash savings rates and inflation is the norm. The last time cash savings rates exceeded the inflation rate was in 2018, but it was the first time in 10 years.

Alternatively, you could invest in other types of assets, like gold or physical real estate. But then you take on other risks. Commodities like gold can be more volatile and unpredictable than equities, for example. And real estate is less liquid than stocks and often shows slower growth.

At the end of the day, stocks are your best growth opportunity -- even with any turbulence an election may cause.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

The market may have a bumpy road ahead, or it may not. Investors have shown an amazing level of resilience in 2020, despite COVID-19, recession, social unrest, and a divisive political environment. Let's hope that resilience continues. And if it doesn't, remember that market volatility is always temporary. Your safest course of action, election year or not, is to sit tight and hold on.

Catherine Brock has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short December 2020 $210 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.