How to soothe clients' election anxiety

As the U.S. presidential election approaches, many financial advisors find themselves fielding the same question from clients: Will my investments be OK?

The question takes many forms: Will a contentious campaign disrupt stocks? If the outcome is contested, will markets grow more volatile? And if my preferred candidate loses, will the winner raise my taxes — or worse?

"Plenty of clients have their worries, no matter which way they vote," said Andrew Herzog, a wealth advisor at The Watchman Group in Plano, Texas. "They have asked how we are preparing their portfolio for the ramifications of President X, who we think is going to win, and whether or not they should pull out of the market entirely before it potentially crashes."

To answer these questions, advisors can point to the data. A new study from the financial research platform YCharts has taken a close look at the historical impact of elections on investments, and it offers some reassuring news for worried clients: The effect is minimal. 

Throughout history, the U.S. stock market has proven remarkably resilient under both Republican and Democratic leadership. In fact, since 1961, the S&P 500 has only lost ground under two presidents: Richard Nixon and George W. Bush.

As for the transition period between presidents, stocks climbed during even the most volatile successions. In the two months between Donald Trump's upset victory in November 2016 and his inauguration in January 2017, the S&P 500 gained 6.2%. And in the period between Joe Biden's election and inauguration — a phase that included a violent insurrection — the S&P gained 14.3%.

"In most cases, the S&P 500 posted positive returns between election day and inauguration day, regardless of who wins the presidency," YCharts wrote.

READ MORE: Almost half of advisors worry about contested presidential election

And for nervous clients thinking of dumping their stocks if the "wrong" candidate wins, the study offers a hypothetical scenario: If a stockholder only invested in the S&P 500 during Democratic presidencies from 1950 to today, they'd get an annualized return of 5.1%. If they only invested during Republican presidencies, that return would be 2.8%.

Or, if the person stayed invested the whole time, under both Democrats and Republicans, their return would be 8.1%. The lesson is clear: It does not pay to play politics with one's investments. 

"Making investment decisions based on who's in office usually hurts portfolio performance," Herzog said. "Let's not assume the executive branch has more power than it really does to control markets."

And yet some wealth managers can recall clients who did exactly that — or at least contemplated it in a moment of anxiety.

One of those advisors is Rob Arnott, founder of the investment firm Research Affiliates and a portfolio manager at PIMCO. In 2004, one of Arnott's clients — a lifelong Democrat — had a foreboding sense that George W. Bush was about to win reelection, and was getting skittish.

"He was terrified, and he said, 'I want to sell all my stocks,'" he said.

Arnott believes this is just one example of a broader phenomenon: In a country as polarized as the United States, investors tend to become more risk-averse as an election approaches, because voters of both parties believe so much is at stake. After the election is over, however, the net effect on the stock market is highly positive.

"In the run-up to the election, both camps are concerned — they're scared of the outcome — and they will tend to go risk-off," Arnott said. "When the election happens, one of those two groups is going to be happy with the outcome, and will go risk-on. The other group is unhappy with the election, but they're already risk-off."

READ MORE: Retirement confidence falters as election 'ugliness' approaches

The result is that these two camps — risk-friendly and risk-averse — don't just cancel each other out, and stocks don't just stabilize. They soar.

Knowing this, Arnott offered some sound advice before his client could unload his investments.

"I said, 'Please don't,'" he recalled. "'Or if you do, sell your stocks a month or two after the election, because there's liable to be this snap-back effect.' Sure enough, there was a big snap-back, and he decided not to sell the stocks after all."

As the 2024 election draws closer, many advisors may find themselves in similar conversations. To make the same argument Arnott did, they may find it useful to come armed with data like the kind in YCharts' study. As many planners have pointed out, the history of American stocks makes a clear case for staying the course.

"Over the last century, the U.S. equity markets have ultimately appreciated through wars and depressions, as well as numerous different presidents of different political parties," Herzog said. "Staying invested and focused on your goal is the most prudent thing to do."