How Large is Election’s Impact on Stocks?

As we enter the final weeks of the presidential campaign, be prepared to hear media pundits make all kinds of assertions about whether a President Trump or Clinton would be better for the stock market.

Our historical research suggests that who is President, and from which party, has less impact on your portfolio than is often assumed. What’s important, I believe, is to prevent your political biases and emotions from interfering with your investment decisions.

The President and the Market: Is There a Connection?

I am not saying that who is president is unimportant for the economy and the markets; but there are many other market-moving factors at work both at home and abroad over which he or she exercises little or no control—oil prices, interest rates, technological breakthroughs, innovation, entrepreneurism, wars, terrorism, climate change. Besides, the four-year election cycle calendar is a somewhat artificial time period.

For instance, regardless of what one thinks of George W. Bush’s presidency, it’s hard to blame him for inheriting in 2001 a stock market crash (on the heels of an epic stock bubble) that began in March 2000; and the fact that his second term ended less than two months before a powerful market recovery (following the 2008 financial crisis) commenced in March 2009 seems somewhat coincidental.

Let’s now look at the results of our study. We looked at market returns during four-year presidential terms of office from January 1, 1949 to June 15, 2016. These 17 terms of office included nine Republican Presidents and eight Democrats. The average annualized market return during the four-year cycles was 14.9% for Democratic presidents and 8.5% for Republicans. We also performed the same exercise from January 1, 1876 to June 15, 2016, 19 Republican Presidential […]

How to Use a Tax Strategy Like the Top 1 Percent

Many people might have the impression that the top 1 percent of society—those making over $521,411—deal mainly in exotic investments such as derivatives, fine art and rare French wines.

The truth is actually a lot less exciting.

It’s well documented that high-net-worth individuals (HNWIs), in many respects, tend to be more practical in their spending habits than most folks. They appreciate a good deal, and they’re finely attuned to saving money where they can—one of the biggest contributors to how they got where they are.

“What are the three words that profile the affluent?” ask Thomas Stanley and Willian Danko in their bestseller The Millionaire Next Door: The Surprising Secrets of America’s Wealthy. The answer? “FRUGAL FRUGAL FRUGAL.”

This penny-pinching attitude extends to their investment decisions.

So if they’re not investing in Picassos and Renoirs, or $20,000 bottles of Romanée-Conti, what are they investing in?


That’s the finding of Rick Fleming, the SEC’s top investor advocate, charged with analyzing how regulations might impact investors and their investments. Muni bond income, after all, is entirely exempt from federal and often state and local taxes—a feature that should appeal not just to money-saving HNWIs but to all investors.
Avoiding Income Tax with Tax-Free Municipal Bonds
At an SEC summit held August 25, Fleming revealed some statistics he finds both “interesting” and “disturbing.”

“The wealthiest one-half percent of U.S. households,” Fleming said, “now own 42 percent of all municipal bonds, as compared to ownership of 24 percent in 1989.”

Meanwhile, “The bottom 90 percent of U.S. households, as measured by net wealth, now hold less than 5 percent of muni bonds, falling from almost 15 percent in 1989.”

Let’s do the math. The muni market is currently valued at $3.71 trillion. Using Fleming’s data, that means a very small percentage of muni investors holds […]

What bond investors should know about higher rates

If you have tuned into financial media over the past few weeks, you have heard plenty of talk about the uncertainty surrounding Fed policy—with many investors wondering how fast and high the Fed will raise rates.

While the prospect of a Fed policy change is significant, it doesn’t mean rates overall will rise dramatically, and it doesn’t change the important role bonds can play in a portfolio. If you have a diversified portfolio that makes sense for your investment goals, time horizon, and financial circumstance, you can probably ignore the short-term concerns about a rate change.

Here are four features of bonds that may help you maintain your perspective.

Even in a rising rate environment, bonds may still perform when you need them.

If rates rise, it could cause the value of your bonds and bond funds to fall, and that kind of loss can cause anxiety and concern. But it makes sense to remember why you invested in the first place. Even in a period when bond returns may struggle, they can still play a role in a portfolio, because they may rally at times that stocks fall—say in the event of a crisis, economic slowdown, or other unforeseen event.

For long-term investors, rising rates can help bond fund performance.

If rates go up, the prices of bonds should drop. But that’s not where the story ends. In a portfolio of bonds, the income from new bonds will be higher after rates rise, providing the potential to more than offset price losses over time—if you stay invested.

That’s why the amount of time you plan to invest is important when it comes to bonds. Bonds and funds with shorter durations reach this breakeven point faster, so they may be more […]

Signal and Noise

When an economic report or political development is different from expectations, markets react. The impulse to reposition a portfolio can be strong. What can be lost in a myopic focus on the moment is that these short-term surprises often wash out with time.

What matters most is longer-term trends. These trends reflect slow-moving forces such as globalization, technology adoption, and demographics. When changes occur—the fall of Communism, the rise of the Internet, and accelerating globalization in the 1990s—they unfold gradually, not in a single headline.

In the decade ahead, the dominant trends will be slower and more balanced economic growth, subdued inflation, and investment returns that fall short of historical averages. Even so, stocks are likely to reward investors with a risk premium; bonds can be expected to diversify stock market risk; and an asset allocation managed with discipline, diversification, and patience is likely to deliver inflation-adjusted returns that can help investors meet their goals.

Source:  Joe Davis, Vanguard

Looking At Your Portfolio Hurts Returns

Earlier this week, we examined a pair of studies that sought to explore the relationship between the equity premium puzzle and investor behavior, specifically a behavior known as myopic loss aversion (MLA). MLA describes the tendency of investors who are loss-averse to evaluate their portfolios too frequently, thus causing them to take a short-term view of investing. That, in turn, leads to a focus on the short-term volatility of the market and, as a result, they invest too little in risky assets.

Today we’ll look at some evidence from the academic literature that illustrates how MLA can be impacted by the frequency with which an investor evaluates his or her portfolio, as well as its implication for investors and some other possible explanations for the equity premium puzzle.

Looking Hurts More Than Not Looking

Based on historical evidence for the S&P 500 Index from 1950 through 2014, investors who check their portfolios on a daily basis can expect to see losses 46% of the time and see gains 54% of the time.

However, while they see gains more frequently than losses, because the average investor tends to feel the pain of a loss with twice the intensity that joy is felt from an equal-sized gain, the more often investors check the value of their portfolios, the more net pain is felt.

The pain/joy meter for an investor who checks his or her portfolio daily will show an average of -38 ([-46 x 2] + [54 x 1]).

Over the period 1927 through 2015, investors who resisted the urge to check their portfolios daily and moved to a monthly check experienced losses only 38% of the time. That reduced the net pain reading from -38 to -14 ([-38 x 2] + […]