As the nation approaches another presidential election, investors face the inevitable volatility and uncertainty that often accompany such significant political events. Presidential elections can lead to market fluctuation driven by shifts in policy expectations, investor sentiment, and general economic outlook. While predicting the exact market response to a new administration is impossible, there are steps investors can take to better position their portfolios ahead of the election.
1. Review Your Risk Tolerance
Presidential elections bring uncertainties that can translate into increased market volatility. This is an excellent time to revisit your risk tolerance. If you find yourself anxious about the potential ups and downs, consider adjusting your asset allocation to align with your comfort level. Reducing exposure to high-risk investments like volatile stocks might help you sleep better at night. Alternatively, if you’re comfortable with short-term risks for long-term growth, you might not need to make drastic changes. For guidance on assessing your risk tolerance, check out our ‘MyRisk’ tool that calculates your investor risk score.
2. Assess Your Asset Allocation
With market movements potentially on the horizon, it’s worth assessing whether your asset allocation still aligns with your financial goals and timeline. For investors nearing retirement or with short-term needs, now could be the right time to rebalance portfolios and allocate more towards conservative assets like bonds or dividend-paying stocks. For long-term investors, maintaining a diversified mix of assets might provide the stability needed to weather election-related volatility.
3. Consider Sector Exposure
Different sectors can react differently based on potential changes in policy and regulation. For instance, the tech and renewable energy sectors might respond more positively to policies favoring innovation and environmental initiatives. Conversely, industries like defense, pharmaceuticals, or traditional energy might fluctuate depending on perceived regulatory and policy shifts. While it’s impossible to predict outcomes precisely, having a balanced exposure across multiple sectors can reduce the impact of political changes on your portfolio.
4. Revisit Tax-Efficient Strategies
Tax policies are frequently a topic of debate during presidential elections. Whether discussions revolve around the capital gains tax, estate tax, or corporate tax rates, these changes could impact the after-tax returns on your investments. Consider exploring tax-efficient strategies such as tax-loss harvesting, Roth conversions, or adjusting the timing of capital gains.
5. Stay Diversified
Diversification is one of the most reliable ways to protect your portfolio against market volatility. While some sectors may face challenges, others could thrive depending on the election outcome. A diversified portfolio that includes a mix of stocks, bonds, international investments, and alternative assets can help minimize risk while capturing growth opportunities in different market environments.
6. Focus on Long-Term Goals
Election-related market volatility is usually temporary, but making impulsive decisions can have lasting consequences on your portfolio. Keeping a long-term perspective and avoiding drastic moves based on short-term fluctuations is key. Remember, your investment strategy should be driven by your financial goals, risk tolerance, and time horizon—not the headlines of the day.
7. Hold Cash as a Buffer
If you anticipate a potential market downturn or experience heightened uncertainty, holding a cash reserve can act as a buffer. This provides flexibility to take advantage of buying opportunities if stocks fall, or gives peace of mind if you need to cover expenses without tapping into your investments.
Final Thoughts
Presidential elections bring uncertainties, but they also offer opportunities for disciplined, well-prepared investors. By reviewing your portfolio, focusing on long-term goals, and maintaining a diversified strategy, you can reduce election-related anxieties and keep your investment plan on track.
If you want to learn more about what each candidate in this cycle is proposing when it comes to your taxes, check out our sister company, Asset Strategy’s podcast breaking down the different tax policies.