Here’s an interesting puzzle: Why do we cringe at the sight or sound of breaking glass, but we salivate over breaking news?
In the run-up to the U.S. presidential election, you’ve probably been hit by enough breaking news to propel you well into 2021. Predictions abound on who will prevail, and what will happen to our political, social, and economic landscape as a (supposedly) direct result.
Come what may, the results will undoubtedly be attention-grabbing and action-packed. Social media and the popular press will see to that, as they feed on – and are fed by – our fascination with things that break.
To counter all the excitement, we offer three calming insights:
Cause and effect are rarely as direct as we might hope or fear. Please apply this point to any temptation you may be feeling to alter your investments because “X” has just happened, or in case “Y” seems about to. Before, during, and after the election cycle, pundits will be proclaiming they can predict the financial fallout from an election characterized by such stark contrasts. At least in terms of tomorrow’s market prices, they do not know. They cannot know. There are simply far too many interacting interests to make the call.
It’s much easier to explain an outcome than to predict it. In this Forbes column, the author describes how scientists have detailed models for explaining why volcanoes occur. But they still cannot predict each eruption. The same can be said for financial markets. We have excellent models for explaining a market’s overall factors and forces. But our ability to predict its individual events or specific moves remains as elusive as ever. How many hundreds of times have you heard this quote over the last four years: “The polls [and/or] election predictions were dead wrong in 2016.” Actually, the predictions stated about three weeks before the election, that Hillary Clinton had a 90% chance of winning. While statistically accurate, this is terribly misleading and prone to a huge amount of misunderstanding. A 90% chance in no way guarantees any outcome – it’s just a reflection that the odds are favored (not guaranteed) to go one way or another. Furthermore, most polls only looked at the national average. That has never been the way we elect presidents in this country. We elect presidents by the electoral colleges, not a national popular vote. So, if you hear that Biden is beating Trump in the polls, or vice versa, you can reasonably dismiss any prediction and assume it’s a 50-50 chance. Right now, when looked at from a predictive standpoint, Biden is still edging out Trump, but only by 20%. The predictive markets right now are stating that Biden has a 60% chance of winning… Keeping in mind what was just stated above, this is still a very, very tight race - in fact it’s closer to 50-50 when considering some of the swing states, as well as the inherent inaccuracy of many polls.
Elections come and go. Your investments last a lifetime. As U.S. voters, we have the opportunity to select our next president every four years. As investors, we are best served by measuring the balance of power in our portfolio across decades rather than years. As Dimensional Fund Advisors has demonstrated in this excellent illustration, “for nearly 100 years of US presidential terms [the data] shows a consistent upward march for US equities regardless of the administration in place.”
In other words, no matter which political party is in power, your best chance for achieving your personal financial goals remains the same: Continue to give your investments ample time and space to benefit from the market forces just described. As we move together through the breaking news yet to unfold, we hope you vote according to your values, but heed this valuable advice about your lifetime investments.
Stay the course!
