Hello everyone and welcome to the Retiring Canada Podcast!
In today's episode, we're diving into elections and their impact on your finances.
We’ll cover:
- How presidential elections can affect your retirement portfolio.
- Two resources to help illustrate this impact.
- Key portfolio considerations leading up to an election.
- Two strategies to help mitigate election-related market turbulence.
- Action items for you to consider.
First, a big disclaimer:
This episode isn't political. We're focusing on historical facts supported by evidence. I’ll use U.S. electoral and market data to explain how the U.S. stock market has performed under different political parties.
Now, you might be wondering why I’m not focusing on the Canadian market and political parties. The reason is simple: the U.S. stock market represents about 60% of the global stock market, while Canada accounts for only about 3%. What happens south of the border is likely to have a bigger impact on your portfolio than what happens here at home—unless you’re heavily invested in Canadian equities. In that case, Canadian political events will have a more immediate impact on your portfolio.
We often see an over-allocation to Canadian equities in prospective client portfolios before they go through our Fundamental Retirement Plan Process. If you’d like to learn more about this “Canadian bias,” I discuss it in episode 31 of the podcast.
Now, back to politics and your money.
Election season often brings questions about how financial markets will respond. But the outcome of an election is just one of many factors that influence the market.
Many people wonder if they should adjust their investments based on who wins the U.S. presidency. While it's natural to try to connect the dots between election results and stock market performance, history shows us that the outcome of an election is only one piece of the puzzle.
Since 1926, nearly a century’s worth of data on the S&P 500—a key U.S. stock market index—shows that stocks have generally trended upward, regardless of whether Democrats or Republicans were in power.
For more details, check the episode description, where you’ll find two resources I’ll reference today.
The first resource: "The Market and U.S. Presidential Elections."
This is a reminder that when you own a stock or a collection of stocks in a fund or portfolio, you’re investing in companies, not in a political party. In the grand scheme, the president is just one of many factors that can influence the market.
Other factors include interest rates, health crises, oil prices, natural disasters, technological advances, corporate activity, and geopolitics. Regardless of these influences, the companies you invest in are focused on serving their customers and growing their business.
Over the long term, stocks have rewarded disciplined investors across both Democratic and Republican presidencies. This underscores the importance of a long-term investment approach. No matter who’s in office, it’s crucial to stay invested.
The second resource: "How U.S. Stocks Have Behaved in an Election Month," which shows that since 1926, there’s no consistent pattern in the market’s reaction during an election month.
Elections & Your Money, with the upcoming election this fall, making drastic changes in an attempt to predict the market is a fool’s errand.
There are two key considerations to review, regardless of the election cycle, to help ensure your portfolio can weather any storm: your comfort level with risk and whether you’re being properly compensated for that risk.
This is all about investment allocation, and it’s the first step in our Fundamental Retirement Plan Process. During this step, we provide a questionnaire and engage in a detailed discussion to gauge your comfort with risk. We also review your current portfolio, financial statements, and tax information.
We often find that people’s portfolios aren’t efficiently constructed from a risk-adjusted return standpoint. Simply put, they’re not being properly compensated for the risk they’re taking with their investments.
This review process is especially important for those looking to retire within the next five years and start withdrawing money to live on.
I encourage you to check out our Fundamental Retirement Plan Process detailed on our website.
In the meantime, here are two ways to help mitigate election turbulence:
1. Review your portfolio for weaknesses—particularly in how you’re being compensated for the amount of risk you’re taking. In advisor terms, this is known as the Sharpe ratio or your risk-adjusted rate of return. Your key goal should be diversification across asset classes to help mitigate the impact of any one event on your portfolio.
Consider adding alternative investments like private credit and private real estate to further diversify your portfolio and reduce the impact of volatile price movements in public equity and fixed income markets. For more on this, check out episode 24, where I discuss alternative investments in detail.
2. Ensure you have a properly structured retirement income plan guided by five key principles:
- Live off multiple streams of income.
- Rely primarily on the investment income produced by your principal.
- Ensure your income increases throughout retirement to keep pace with the cost of living.
- Make your income as tax-efficient as possible.
Proper income planning is intertwined with your investment and tax plan, giving you visibility into the future and enabling you to understand how your decisions today will impact your future.
Done correctly, income planning can give you the confidence that you’re making the right decisions, regardless of which political party is in power or what world events may impact your retirement portfolio.
Now, let’s get into your action items for today’s episode:
1. Tune out the noise as best you can. In today’s world, this is nearly impossible unless you disconnect from technology completely. Political noise, in particular, has become increasingly divisive, causing more fear and anxiety about the future.
Yes, it’s important to stay informed and vote for who you think should lead. But beyond that, if you’re not in politics yourself, it’s wise to limit your consumption of political information. Overconsumption can intrude on your relationships, your work, and your retirement decisions.
2. Stay focused as a long-term investor. The biggest threat to your retirement isn’t the red team or the blue team—it’s you. Your emotions and the decisions you make with your retirement portfolio will have a lasting impact on your ability to stay retired.
That’s it for today’s episode.
For the links and resources discussed, please check the show notes or visit retiringcanada.ca. If you enjoyed the show, please subscribe and leave us a 5-star review on your favorite podcast app. Be sure to sign up for my weekly Retiring Canada newsletter.
And remember, when it comes to your retirement, don’t take chances—make a plan so YOU can retire with confidence.
All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.