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Three Ways To Invest Following The Midterm Elections

| November 07, 2018
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Yesterday, Americans exercised their right to vote.  Some races went as planned and others were a surprise. The best part of the election was simply knowing that the robo-calls, political flyers and the negative television ads were finally going to stop.

But now that the votes are in, how should you invest?  Here are three things to consider…

#1 - Learning from history

This October, while much more volatile than previous months this year, was very much in line with norms for volatility.  Actually, October tends to be one of the more volatile months for the stock market in any given year.  In the past, midterm election years typically are fairly flat for the first three quarters with most of the return coming in Q4.  See this article from Barron’s Magazine published in September to illustrate this point. 

On an annual basis, the third year of a Presidential cycle tends to be the best year of the four - usually in a significant way.  MarketWatch wrote a recent article that is very telling as the chart below depicts. 

Since WWII there have been 18 midterm elections.  Following every single one, stocks were higher 12 months later.  18 out of 18 isn’t a bad batting average.  The average return during those 12 months was 17%.

#2 - Valuations matter

Investing requires making hard decisions…you have to invest in something.  “Doing nothing” is a vote to invest in Cash.  What about Real Estate? It has had a good run, but some areas of the real estate market are currently over-valued.  Commodities are another choice, but usually they are just used as a hedge against risks, and they are not usually a significant allocation in a diversified portfolio. Bonds are safe, right? But if interest rates go up, the market value of bonds usually goes down, which has certainly been the case during the first half of 2018 - and likely to continue into 2019.

That leaves the final category of investment types: Stocks.  But how are they valued?  In the chart below, Legg Mason shows that with this October’s correction, stocks are already slightly below the long term averages in terms of how they are valued…clearly not in investment “bubble” territory.  If you factor in the higher earnings forecasts for 2019, valuations look even better.  True investing is best done “buying low and selling high,” and stocks may just be the lowest valued of the five asset categories discussed above.

 

#3 - The lost art of rebalancing

Buying low and selling high seems like such an easy concept until someone becomes an investor.  In virtually every other purchasing scenario, people seek a bargain, whether it be for a car, a new suit or a can of green beans. But apply that logic to shares of a stock and “investors” (and many advisors) find themselves buying what “feels” good and selling what “feels” bad - just the opposite of the “buy low/sell high” philosophy.

Following one’s emotions when it comes to investing can lead to bad decisions.  Therefore, having rigorous investment practices helps to keep bad emotional decisions at bay.  At SRQ Wealth, we follow three principals and three practices when it comes to our investment disciplines, and one of the most important of these is RebalancingClick here to learn more. 

Rebalancing seems simple, but in practice, it can be challenging.  This year, many international  and domestic value stock portfolios (typically more well-established, dividend paying companies) have had a tough year compared to domestic growth stocks.  With tech stocks doing so well, it is difficult to think of selling them, but that is exactly what should be done to properly rebalance. It is an unemotional, systematic way to “sell high, then take the proceeds and “buy low.”

I can remember 1999-2000 vividly. Tech stocks were at all time highs and old-line companies and investors like Warren Buffett were considered dinosaurs. However those that fared best over the next 3 years were those that followed the unemotional, systematic practice of rebalancing. 

Elections are important and how you invest before and after is also important. SRQ Wealth believes that following proven Principals and Practices when it comes to investing leads to better results long-term. Hopefully, our elected officials return to good solid principals and practices for their line of work as well.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

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