The upcoming election has many people fretting over their finances and, as a result, they are reaching out for professional help on savings, investments, and estate planning.
Indeed, an informal survey of a group of MassMutual financial professionals found that 53 percent have seen an uptick in unsolicited calls from clients concerned about the election, and roughly 76 percent said they expect that number to climb in the coming weeks. Given the uncertainties that linger in 2020, particularly the economic fallout from COVID-19, it’s no surprise that investors this year may require more guidance than usual. (Need a financial professional? Find one here)
“My clients are worried about this election,” said survey respondent Amie Fox, a financial professional with Skylight Financial Group in Cleveland, Ohio. “They are bringing it up in almost every service meeting and in new client strategy meetings.”
To help alleviate anxiety, nearly three-quarters (72 percent) of the financial professionals surveyed said they have or plan to connect with their clients on this topic, even just as part of a regularly scheduled check-in. Others are taking proactive steps to remind them that market timing rarely works and to put election year trends into context.
For example, retail investors are sometimes quick to assume that one party might be better for market performance than another, based on the business and economic policies and priorities espoused during campaigning. But various analyses suggest such impressions may be misplaced. (Related: What the election, amid the pandemic, means for markets)
Also, while it’s true that stock market returns do tend to be slightly lower in the 12-months following a presidential election — returning an average of 5 percent compared with the 8.5 percent average return in any given 12-month period — they hardly fall off a cliff, according to a historical analysis of election year market performance by U.S. Bank. Interestingly, the analysis found that the modest decline in equity returns seen immediately after an election appears not to be correlated with which party takes office, but returns do tend to be more muted when a different party comes into power.1
Past performance, of course, is no guarantee of future returns. But for long-term investors, MassMutual financial professionals generally agree that the outcome of this or any other election should not in itself precipitate a strategy shift for average investors and savers.
“People are surprised to find out that political party has minimal impact [on their portfolios], and to learn which party has a more positive impact on the markets — it's not usually who they think,” said survey respondent Dominic Marinucci, a MassMutual financial professional in Exton, Pennsylvania. “I do not recommend changing strategies simply because of the election. The markets are essentially politically agnostic in the long term; in the short term, there's minimal impact — not enough for us to be concerned.”
Pre-retirees and retirees worry
If survey results are any guide, pre-retirees and retirees are reaching out to their MassMutual financial professionals, especially those who worry about volatility and asset preservation. (Related: How life insurance can help you in retirement)
Some are asking if they should exit the stock market now and move their money to cash, a practice that most financial professionals discourage. After all, older Americans may spend 30 years or more in retirement. To outpace inflation and maintain their lifestyle, investors typically keep a portion of their savings invested for growth.
Retirees can potentially reduce their exposure to volatility, however, by creating a cash cushion valued at anywhere from six months' to a year’s worth of living expenses that they can tap during bear market downturns — so they aren’t compelled to liquidate their holdings when stock prices are low. (Related: Protecting yourself against market fluctuations in retirement)
Affluent investors fear change
Not surprisingly, the MassMutual financial professionals surveyed said some affluent investors are voicing particular concern about the pending election, since tax policy on a number of fronts is part of the ongoing campaign debates.
These issues include changes to the level of individual income tax and capital gains tax rates, as well as the federal estate tax and gift tax exemption thresholds (which currently stand at $11.58 million and $15,000 respectively per recipient annually). (Related: 3 ways to financially prepare when an election looms)
As a result, survey respondent Nick Caporaso, a MassMutual financial professional in Syosset, New York, said he is advising high net worth clients to calculate their potential tax liability under both possible election outcomes with their financial and tax professional.
“There are various options, but we would have to sit down and do an in-depth tax analysis, speak with their accountant, and look at every single position in their accounts, comparing cost basis and current value of each,” he said, noting that he is currently reviewing his clients’ investment portfolios and strategizing for worst-case scenarios. “We then will see the impact year by year in dollars and cents.”
Wealthy taxpayers, for example, who were already planning to pass a portion of their assets along to their heirs, may wish to consider making a larger tax-free gift this year to take advantage of the higher gift tax exemption threshold, Caporaso said, in case it disappears under either future president.
They may also wish to explore tax-friendly estate-planning tools. For example, permanent life insurance, like whole life insurance, provides a guaranteed (income tax free) death benefit to beneficiaries when the policyowner passes away. Such policies also accumulate cash value on a tax-deferred basis, which can be used during the policyowner’s lifetime to help pay for emergencies, supplement retirement income, or fund college tuition. Money borrowed or taken from the cash value of a life insurance policy is not subject to taxes up to the “cost basis” — the amount paid into the policy through premiums. Just remember that tapping into the cash value reduces its value and death benefit. It also increases the likelihood that the policy will lapse. (Learn more: Life insurance: 3 income tax advantages)
For households that are not high net worth, many financial professionals believe any proposed tax law changes are unlikely to affect their financial picture or portfolio returns in a substantive way.
“The market doesn't care who wins; the market just wants to know what the rules are,” said survey respondent Nathan Way, president and owner of Novity Wealth Solutions in Williamsville, New York. “Once that is clear, the market will begin to rotate to the perceived winners and losers based on policy and speculation. The best bet is to stay focused on your investment strategy and goals and look beyond short-term events.”
Market timing is tempting, but tricky
Investors aren’t just losing sleep over which party wins the election. The MassMutual financial professionals surveyed said some clients are concerned about stock market volatility and a potential economic recession. That’s potentially more likely if the outcome of the election is contested and drawn out.
Fox’s advice? If your tolerance for risk has changed, you can revisit your portfolio strategy. If not, and your asset allocation still reflects your time horizon and financial goals, stay the course no matter how the markets move in the aftermath of the election. Remember, she said, long-term investment projections assume that not all market years are positive. Those who continue to make regular contributions to their retirement plan regardless of market volatility help to smooth their average purchase price by ensuring that they buy some stocks when valuations are high, and some when valuations are low — a concept known as dollar-cost averaging.
Not all who seek to sell their equity positions and build cash-on-hand this fall are motivated by fear. Some are opportunists who expect the election (whatever the outcome) to fuel market losses, if only temporarily, and don’t want to "miss an opportunity” to buy on a dip, the survey revealed.
Some financial professionals pointed out that it may be tempting for some investors to take some profits now on highly appreciated stocks, given the market’s run up since late March. However, the majority maintained that buy-and-hold investors should keep their money invested. Market timing, they agreed, is generally not a successful long-term strategy for building wealth. (Related: How you can win with a steady investment strategy)
That doesn’t preclude investors, however, from being tactical, said survey respondent Thomas Cornfield, a financial professional with Generational Financial Group in Southfield, Michigan.
“Keep a long-term perspective: be conservative with near-term assets, more aggressive with long-term assets, and use tactical management and/or contractual guarantees,” he said, noting financial services products, such as annuities, provide guaranteed income during retirement in exchange for an upfront payment and can potentially help reduce a retiree’s exposure to market risk.
Investors are understandably nervous as Election Day approaches, but their portfolios may not much care who gets named the next president. Trust your long-term strategy, review your financial picture for potential tax ramifications, and take emotion off the table by seeking out sound guidance.
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1 U.S. Bank, “How presidential elections affect the stock market,” 2020.