by DANNY WILLIAMS
We have recently had the privilege of voting to elect our country’s 57th President. Of course, we know who won at this point, but there was uncertainty until the results were tabulated on election night. The race seemed to become closer, according to the polls, as Election Day approached. It was anyone’s guess as to who would serve for the next four years. Some polls were showing a virtual tie and many thought that the difference would come down to key battle ground states like Ohio and Florida.
One of the most popular questions I was asked over the past few months was, “What will be the effect on the market if President Obama wins another term versus Governor Romney winning the election?”
Many investors are looking for an edge on how to go forward with their investments. This is very understandable. According to Fox Business, history shows that the U.S. economy, stock prices, and corporate profits have generated stronger growth under Democratic administrations than Republican ones.
According to McGraw-Hill, the S&P 500 has rallied an average of 12.1% per year since 1901 when Democrats occupied the White House, compared to 5.1% for Republicans. One thing that should be pointed out is that there is a relatively small sample size over the time period this information has been calculated.
I think back on the past several years of current events. The financial crisis of 2007- 2008 was devastating to many. Our own banking system and many other large, corporate businesses took significant losses, and many went out of business or merged into others. This housing bubble created this situation.
The recent uncertainty of a Presidential election and the worst housing bubble in our nation’s history has probably made you think a little more about your financial well-being. These are only two of the issues that have driven our market’s direction over the past number of months and years. To a great degree, there are many opportunities for us to allow our emotions to come into play when making our important investment decisions. Now, it seems like the impending “fiscal cliff” has captured the attention of the political and business world. Our political leaders are once again making decisions (or not) that can have an impact on our economy and the markets. This is another current event that make most investors even more concerned. It also makes them wonder how to be successful in this type of environment—and my experience has been that if we let emotions enter into our decision making process, we will usually be wrong.
There are many investment strategies in the market place. Many investment advisors and investors who will say, “I am just going to take what the market gives me and let asset allocation take care of my investments.” This is an especially easy decision after we have just enjoyed a 10% up year. The choice is not so easy when you have a 25-50% down year. The market statistics point towards this type of experience occurring again—and the longer you stay in the market, the more likely you will experience one or more of these down periods. The decline is difficult enough, but living through the decline and recovery may take a decade. Unfortunately, this experience may occur when you are retiring or have limited earning capacity.
There are alternatives to adopting a buy and hold strategy or counting on asset allocation to take care of you. Some strategies have predefined rules that are put in place to reduce risk or volatility in the portfolio. When I mention alternatives, I don’t necessarily mean investing in a mutual fund or separate account. There are many people who have turned their money over to a “professional money manager” just to see the value of their account go through a major decline. Many of these professional managers have a disciplined approach and do a great job when the markets are favorable, but they still stay fully invested in the market during good and bad markets. Many times this leads to disappointing results. Someone needs to be in a position to manage the manager, if hiring professional managers— and this person needs to have a predefined rule that is used to manage risk in a declining market.
When we are investing in the market, volatility will be a part of the process. Simply said, in order for you to benefit, you must be willing to accept negative returns during certain time periods. We wish that we could say otherwise but it’s one of the “givens.”
Our beliefs do not try to paint a picture of the future. Think about it for just a minute. If we looked back just a year ago, we would not have been able to say for certain whom the Republican nominee would be, much less who would be the next President of the United States.
What strategy will you adopt to help navigate the future markets? It seems that many investors have selected an approach that requires them to treat all markets the same. We think there are times that we need to take advantage of a great long-term bull market or nice uptrend, but we also know that we need to make adjustments if we enter a period of stormy conditions. We believe it is imperative for us to keep our emotions out of the process, and to recognize changes that will take place along the way. We have to be willing to look for the signals that are given to us and act accordingly.
I encourage you to think about your past investment experiences and commit to ask thoughtful questions about how your money is being managed today, as well as plans for the next downturn.
Happy New Year!
Danny Williams, CFP®, is a partner with Woodridge Capital, a registered investment advisory company located at 800 Woodlands Parkway, Suite 201, Ridgeland, MS. For more information, call 601-957-6006 or firstname.lastname@example.org.