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Cents and Sensibility Guy Steele |
Don’t worry about
elections when making
investmentsAlthough the presidential campaign hasn't fully heated up yet, it will soon. As a citizen, of course, you may be quite interested in the election. But as an investor, should you be equally attentive?
It might seem that the presidential race brings out some issues that could have a substantial effect on your investments. In the weeks and months ahead, you are likely to hear a lot about the loss of manufacturing jobs, the growing budget deficit, problems in Iraq, strains between the U.S. and other countries, environmental concerns and other topics.
Clearly, these are serious subjects, worthy of a national debate. However, they probably shouldn't drive your investment decisions. The financial markets are most strongly influenced by corporate profits and the performance of the economy -- and, right now, both these variables are looking pretty favorable.
Cyclic pattern
In the investment world, as in most walks of life, what's happened in the past doesn't always foretell the future. Yet, it's interesting to note that, for the past 60 years or so, the financial markets have done better in the last two years of four-year presidential cycles than they did in the first two. In fact, since 1941, the average returns of the Dow Jones Industrial Average in the third and fourth years of presidential cycles have been 21.3 percent and 11.7 percent, respectively, according to an analysis cited in the Wall Street Journal. But the returns for the first two years have just been 7.9 percent and 9.6 percent.You can't count on these figures as a guide to your near-term expectations.
Nonetheless, for what it's worth to you as an investor in 2004, history is on your side.
After the election
Like anyone else, you'll have your own reasons to vote for one presidential candidate or another. But, as you look to the future, don't make the mistake of thinking that the fate of your candidate is inextricably linked to the success or failure of your investments.The fact is that the markets have done well and poorly under both Democratic and Republican administrations; neither party has a monopoly on the good times or the bad. Consequently, as you plan your investment strategies for the next few years, don't read too much into the outcome of the election.
In fact, your best bet is to follow some tried-and-true investment techniques before and after the presidential contest.
Here are a couple to consider:
» Look for quality. Political leaders come and go and the economy will always ebb and flow. But if you invest for quality, you may never be "out of style." So, when you're considering a stock, look at the fundamentals of the company. Is its management sound? Are its products competitive? Does it have a solid business philosophy? Does it have a solid track record of earnings? If you're investing in bonds, make sure they receive the highest grades from the independent rating agencies.» Look for diversification. Once you find a high-quality stock, bond or other investment, you need to determine if it's a good fit in your diversified portfolio. For example, suppose you discover a growth stock that you really like. If you already own several others that are similar, you may not be helping yourself much by adding the new stock -- and you could be diverting resources from other investment opportunities.
» Cast your vote, and invest wisely. This November, make sure you vote; it's important for all of us to participate in our democracy. But try to keep your investment plans separate, as much as possible, from the electoral process.
See the Columnists section for some past articles.
Guy Steele is a financial planner and head of the Pali Palms office of Edward Jones. Send planning and investing questions to him at 970 N. Kalaheo Ave., Suite C-210, Kailua, Hawaii, 96734, or call 254-0688