volatility

S2 E1: Will the Upcoming Presidential Election Impact Your Investments?

Financial Finesse S2E1: Will the Upcoming Presidential Election Impact Your Investments?

Why Staying In The Moment Doesn't Apply To The Stock Market

Today I’m so excited to kick off Season 2 of the Financial Finesse podcast, which I’m calling, “What Keeps You Up At Night?” Many of us are dealing with heightened anxiety these days due to a renewed surge in COVID cases, the uncertainty of the upcoming (and exceedingly contentious) presidential election, and a general feeling of instability in the world. 

In addition, people are nervous about what this election may mean for their investments and financial future–and for good reason. The media takes every opportunity to sensationalize what may or may not happen in November and beyond. That’s why in this episode I encourage listeners to take a long-term view. Stocks tend to rise more often than they fall, and moment-to-moment volatility is simply the price of investing in the stock market–regardless of whether it’s an election year. 

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S2 E1 Transcript: Will the Upcoming Presidential Election Impact Your Investments?

Welcome to season two of the Financial Finesse podcast. I’m Cathy Curtis, founder of Curtis Financial Planning, and a CFP®, focusing on the finances of female clients. I’m calling the second season, “What keeps you up at night?” Because let’s face it, there are a lot of things that keep us up at night lately. We’ve got rising COVID cases, an extremely contentious election, and just general uncertainty about what the future holds. Since the presidential election is right around the corner, I get a lot of questions from clients about what I think will happen to the stock market if the Democrats or Republicans prevail. So I thought I would start talking about that, for this first episode of the season.

To give a little perspective, the stock market has not done so badly considering the events of the year. The S&P 500, representing the 500 largest companies in the US, is up almost 8%. Now granted, this is largely due to the large mega cap tech stocks such as Facebook, Google, Apple, and Amazon. But many of us own those stocks in the mutual funds that we hold either in our 401Ks or other accounts. Smaller size US companies, as represented by the Russell 2000 index, are down about 2%. International stocks, as represented by the EAFE index are down about 7%. And emerging market stocks are up almost 2%.

So let’s go back to this question, do markets perform better under a Democratic or Republican administration? Well, yes, presidents do have a lot of power, but they really don’t control the stock market. Maybe to some extent they do because of the policies that are put in place during their administrations. But with all the factors affecting the staggeringly complex markets and the overall economy, presidencies don’t matter as much as they seem to during campaign season such as we are in right now, where you can’t get away from the election news.

The truth is that an argument could be made either way for each candidate. For instance, the consensus thought is that corporate taxes will rise if Biden wins, presumably bad for stocks. He would also most likely tighten federal regulations on auto emissions and the environment. Good news for alternative energy and electric car companies, not so good if you own shares of let’s say Exxon Mobil.

However, Trump’s environmental policies have been favorable to Exxon Mobil. Yet the company stock has been one of the worst performers of the year. If Trump wins, he will probably move further in lightening up the tax and regulatory burdens on corporations, helping stock prices.

On the other hand, Biden’s policies would boost the economy by improving public health, increasing American trade and engaging infrastructure spending that could give the economy a much needed boost and a chance to expand.

The fact is that stocks have risen and fallen under both Democratic and Republican presidents. And more often than not, they rise. Instead of focusing on the short term, which is the election, a much more important lesson from history is simply time in the market, not timing political cycles.

It still holds true that no matter the ups and downs, from 1929 to 2019, the largest US companies have generated annualized returns of about 10%. No doubt the volatility will remain high through the election season, and maybe after if the results are close. In this case, keep in mind a key concept of investing. volatility is just a characteristic of stocks. It doesn’t imply the direction of stocks. Volatility is the price we pay for the higher return stocks provide. And that most of us need to meet our goals. And it’s only temporary.

One common way to reduce anxiety in most areas of life is to stay in the moment. The exception to this I would argue is when thinking about the stock market. It really pays to take the long view and ignore the moment-by-moment activity.

Thank you for listening. And please stay tuned for my next episode of what keeps you up at night, which will be posted two weeks from tomorrow, Tuesday, October 20. And if you have any questions, please be sure and let me know via my email, cathy@curtisfinancialplanning.com, or on Twitter, @CathyCurtis, or on my Facebook business page, Women and Money. I’d love to hear from you and what’s keeping you up at night. Bye for now.

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NoBody Knows – And That is Why You Diversify

The Sun Tarot card

the sun tarot– Nobody knew that the yield on the 10 year Treasury would keep going down. – Nobody knew that the price of a barrel of oil would drop by 55%. – Nobody knew the Russian ruble would crash. – Nobody knew that Japan would dip into a technical recession. – Nobody knew that Europe’s tentative recovery would falter and fail. And this week, nobody knew, including Christine LaGarde, the director of the International Monetary Fund, that Switzerland was going to un-peg the Swiss Franc from the Euro. These are just a few of the surprises that happened in the last year that even the most experienced investors didn’t predict. These unexpected events can have either a positive or negative effect on stock and bond markets worldwide. Unexpected events like these are also why most investment professionals, including me, espouse the mantra of diversification. You’ve probably read about diversification in your employee benefits package when signing up for your 401 (k) or from reading investment articles or from your financial advisor. Diversification is what it sounds like – an investment strategy that combines a variety of investments (both U.S. and international, a mix of small and large cap stocks, and a variety of bonds) designed to reduce exposure to risk. However, diversification doesn’t just reduce the downside potential it also reduces the upside potential, in the end, hopefully providing a smoother portfolio trajectory. You might say, what?, why would I want to invest in a strategy that reduces the upside potential? Well, if you knew anyone that bailed out of stocks in 2008 or early 2009 and never reinvested, you will know the answer to that question. A portfolio with 100% invested in the S&P 500 in 2008 lost 37%, and if it had a good dose of large technology stocks even more (the NASDAQ Composite was down 41%). That unfortunate time in stock market history scared off a lot of seasoned and unseasoned investors. If instead, that 2008 portfolio was diversified with a dose of bonds in it, the loss would have been less and the investor, more likely to stay in the market. Which is the point – less volatility is more likely to keep a person invested for the long haul. In 2014, the more diversified your portfolio was, the less closely it would have matched the returns of the S&P 500, which was up 13.69%. The S&P 500 is the index along with the Dow Jones Industrial Average, (up 7.52% in 2014) most often quoted in the media. Below are the 2014 returns of various indexes representing the broader asset classes and geographic areas you would find in a diversified portfolio: REITS (Real Estate Stocks)                 28.0% Inter.Term Bonds                                5.97% US Small Cap Stocks                           4.90% Global Stocks (includes US)                4.0% Hi-Yield Bonds                                    2.46% Emerging Markets Stocks                  -1.8% International Stocks                           -4.90% Global Diversified Bonds                   -5.72% Europe Stocks                                     -7.10% Pacific Stocks                                      -7.10% Commodities(includes oil&gas)        -17.01% Russia Stocks                                       -44.9% As you can see, the returns were all over the map, and mostly down. It was not a great year to invest internationally and definitely not in energy stocks. But nobody could predict that going into 2014, in fact, back then it the world looked like it was poised for synchronized global growth. If you were in a diversified portfolio, you had another decent year, maybe nothing to jump up and down on the bed about, but decent. And, the good thing about decent years, even single digit ones, is that they add up over time. ——————– For additional food for thought on this topic, the attached charts illustrate the randomness of asset class and sector return year by year. Please note that the “AA” or Asset Allocator portfolio was created by novelinvestor.com and is for illustration purposes only. asset class returns s&P 500 sector returns

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