Unemployment is above 8 percent, the federal deficit as a percentage of GDP is the largest since World War II, and the U.S. death toll from COVID-19 is nearing 200,000—yet markets are near their pre-pandemic peaks. Amid all of this turbulence, one of the most anticipated elections in modern history is less than two months away. How should investors respond to so much unprecedented social, economic, and political uncertainty?
In short, they shouldn’t. At least not without taking ample time to revisit their financial plan and long-term goals, say Mike Townsend, Schwab’s vice president for legislative and regulatory affairs, and Brad Bartick, vice president and downtown Denver branch manager. Here are four reasons why.
1. Humans are prone to bias.
Investors who buy or sell based on the latest economic data or the newest political polls often fall victim to recency bias, the tendency to look at the most recent information and give it more weight than long-term data. Then, once an investor believes something to be true, they seek out information that supports their opinion while ignoring contrary information. This is called confirmation bias.
“We get in our own way, but it’s not because we’re dumb or we’re flawed,” says Brad. “We do it, frankly, because we’re human, and making irrational decisions under pressure is just part of our DNA.” And once these biases take hold, it can become difficult to process information without emotions interfering.
2. The economic landscape may have changed—but have your goals?
One of the best ways to stay objective is to have—and stick to—a financial plan. This kind of “long-term roadmap” should include what you’re saving for, how much you need to put away, and how long it will take to reach your goals. It can also provide much-needed perspective when market volatility and political uncertainty are high.
“Think about some of the milestone events that we experience in life—our first real job, getting married, buying a first home, having children, promotions we earn, caring for our elderly parents, our retirement, things like that,” says Brad. “Our circumstances may change, but it’s rare that our long-term goals change. If you stick with your plan, your portfolio can probably survive corrections, and your plan likely can, too.”
3. Election results could take a while.
Since more Americans are likely to vote by mail due to coronavirus concerns, it will take more time to count those mail-in ballots. “That means we are unlikely to know who won on election night—and possibly for days and even weeks afterwards,” says Mike. “It’s something for investors to keep in mind, while being careful not to overreact.” The longer the uncertainty continues, the higher the risk for market volatility—but having a sound financial plan can help you avoid the temptation to make big changes to your portfolio or investment strategy in the midst of any uncertainty.
4. Our investing principles help you withstand the test of time.
No matter the outcome of the election, focusing on the fundamentals can help you weather the potential market response. Follow your financial plan (or create one). Save, invest, diversify, and rebalance to help accomplish your long-term goals—and ignore the noise. “The thing for folks to remember is that we have over 100 years of financial data and science that guides the basic investing principles … and that 100 years covers some extremely dire times for the country,” says Brad. “A lot of the strategy that we use when we build portfolios is to protect us in the face of a future that we can’t predict.”