Sometimes I think the reasons investors buy or sell stocks in their portfolios are so silly. Lately, we’ve been hearing that if so-and-so is President, then I’m going to sell/buy.
Today, I’m going to address some of the underlying reasons that people do this and why it is a bad idea. An efficient market tries to price in every bit of news—the good and the bad. So, if an event (like the presidential election) changes anticipated outcomes (such as lower net incomes due to higher taxes), then the stock market will try to price in the effect of that news into the valuation of the companies that make up the market.
Some investors try to time swings in the market in order to make a profit—if they are correct, they can make a lot of money; if they are wrong, they can lose a lot of money.
In our current situation, Biden has stated that he is going to increase taxes, and Trump has said that he will keep taxes low. If Trump wins, then the stock market will not have to adjust as much because it already knows what to expect. If Biden wins, then the markets will have to re-assess projected earnings and determine how it will affect the economy. The market will likely make similar adjustments based on all the campaign promises of the victor. Even though elections have a short-term impact on markets, it is a bad idea to use any singular event as a reason to buy or sell (regardless of who wins the presidency).
Here are four reasons why you shouldn’t trade on the outcome of the election:
- When you make your decision to buy or sell based on a singular event, then you have changed the purpose of your portfolio from investing to gambling. Gambling is where you bet on one of several potential outcomes in hopes of short-term gains. Investing is where you buy the best assets and hold them until they have fulfilled their purpose.
- You have ignored the tax implications of selling your investments before they have attained long-term capital gains status.
- While some people have made fortunes from day trading, most people fail because they buy high and sell low—to make money, you need to buy low and sell high!
- Unless you’re a prophet, you cannot predict the future with 100% certainty. If you recall the previous election, Hillary Clinton was expected to win, but she didn’t. If you had bought/sold stocks on the assumption that Clinton would win, then you would have hurt your portfolio returns.
To sum up, I recommend that you create a sound investment strategy and stick to it—do not allow singular events to cause you to start gambling with your future! No matter who is President, follow your long-term goals.
