Election Presents a 'Behavioral Trap' for Investors

The upcoming presidential election will present “a behavioral trap of sorts” for investors, according to Daniel Noonan, investment writer at Morningstar Investment management. “If you’re motivated to make changes to your portfolio based on what’s happening in politics, the odds of success likely aren’t in your favor.”

Quoting Eugene Fama, the former portfolio manager said: “Your money is like a bar of soap — the more you handle it, the less you’ll have. That’s probably advice worth keeping close between now and November.”

ThinkAdvisor caught up with Noonan in mid-July to talk about the upcoming election and how advisors should be counseling clients before and after.

THINKADVISOR: Which party works in favor of investors? 

NOONAN: Voters will be rooting for blue or red in November. But if you’re an investor, the vote is for purple (the color you get when you combine them together). Markets like gridlock when different branches are controlled by different parties.

How should investors resist reacting to volatility?

The simplest advice for most investors would be to ignore what’s happening in Washington, D.C.

Of course, this is easier said than done. An election season is likely to bring volatility back into markets. And it’s important for investors to understand that it’s common for that volatility to be misleading.

For example, when Trump was elected in 2016, U.S. stocks immediately sold off around 5% in the overnight trading. If you’re initial reaction was to follow that market movement and sell, it would’ve been a terrible decision. The market finished up over 1% by the time the market closed that day.

There are examples of this across the aisle.

A Trump administration was supposed to be negative for companies with large China exposure given a trade war. Apple — a company with more business in China than arguably any other U.S. company — not only did fine but thrived during this period.