With the U.S. presidential election called, and promising news of COVID-19 vaccines announced, a U.S. market surge reminds us how keen investors are for a sense of closure.
That said, who knows how long this mood will last? Whatever happens between the now and the inauguration, as positive vaccine news collides with skyrocketing Covid case numbers, it will undoubtedly be attention-grabbing and action-packed. Social media and the popular press will see to that, as they feed on – and are fed by – our fascination over breaking news.
When Markets Are Choppy, Keep Calm and Carry On
To counter the turbulence, we offer three insights:
- Cause and effect are rarely as direct as we might hope or fear. Remember this when you feel tempted to alter your investments because “X” has just happened, or in case “Y” seems about to. As current events play out, pundits proclaim that they can predict how the markets will respond. In terms of tomorrow’s market prices, they do not know. There are simply far too many variables to make the call, and we do not know which variables will change from day to day.
- It’s much easier to explain an outcome than to predict it. This Forbes column describes how scientists have detailed models for explaining why volcanoes occur. But they still cannot predict each eruption. The same can be said for financial markets. We have excellent models for explaining a market’s overall factors and forces. But our ability to predict its individual events or specific moves remains as elusive as ever.
- Elections come and go. The pandemic will end. But your investments last a lifetime and beyond. As U.S. voters, we have the opportunity to select our next president every four years. In our recent piece on the relationship between election results and market performance, we conclude that we cannot predict market performance based on the party of the president-elect. This short video from Dimensional Fund Advisors demonstrates that over long periods of time, regardless of who is elected, stocks have historically maintained a steady upward trajectory. And nobody could have predicted the exact twists and turns the Covid-19 pandemic would cause in the markets. As investors, we are best served by viewing our portfolio across decades rather than years.
In other words, from politics to pandemics, the best chance for achieving your personal financial goals remains the same: maintain a disciplined investment approach - establish a globally diversified portfolio based on an asset allocation that suits your risk tolerance and investment goals, rebalance as is warranted, plan for the long term, and tune out the noise. In other words, stay the course - make adjustments based on your life and goals, not what is going on around you.