Should You Buy Stocks Before or After the Election?
The results of the U.S. presidential election could have resounding effects on fiscal policy, the economy, and other matters that could ultimately impact investors' portfolios. Also, no matter who's declared the winner, there could be some pushback from some U.S. citizens or the losing political party.
This raises a timely question: Should people who have excess cash sitting on the sidelines and were considering investing it in stocks do so before or after the election?
Unfortunately, no one has a working crystal ball. But if there's one thing we can learn from history and from the success of some of the world's greatest investors, it's this: There's little value in attempting to time the market. In fact, attempting to do so can be detrimental to long-term investment results.
Image source: Getty Images.
Stay focused on the long haul
The greats in investing have some strong words about market timing -- and those strong words strongly oppose it.
"If we think a business is attractive, it would be very foolish for us to not take action on that because we thought something about what the market was going to do," famed investor Warren Buffett once told Berkshire Hathaway's shareholders at an annual meeting. "If you're right about the business, you'll end up doing fine."
Or take it from Buffett's partner, Charlie Munger:
It's in the nature of stock markets to go way down from time to time. There's no system to avoid bad markets. You can't do it unless you try to time the market, which is a seriously dumb thing to do.
Legendary investor Peter Lynch similarly says: "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."
The market has repeatedly proven to be much more unpredictable than people would expect it to be.
Stocks have survived wars, depressions, recessions, and more
But perhaps you're convinced that this time is different due to the election -- because the stakes are higher, or the country's response to election results could be tumultuous.
If this is your stance, here's something to consider: Between 1921 and 2019, the Dow Jones index increased by an average rate of 8% annually. During that time, the U.S. suffered the Great Depression, World War II, a dozen recessions, the dot-com bubble, the 9/11 terrorist attacks, and many more gut-wrenching challenges.
Stocks may decline during the election or in the weeks after it's over. But history has shown us that though they may be volatile in the near term, they're likely to thrive through adversity if held long enough.
Image source: Getty Images.
Make a plan and stick to it
What's the takeaway from all of this? If you're thinking about whether to invest today, give more weight to business fundamentals -- such as the valuation of stocks or the country's long-term economic potential -- than to attempting to guess where the stock market is headed in the near term.
Furthermore, consider making a predetermined investment plan for your excess cash. That plan could be as simple as investing all of it today and holding on through all the volatility over the next 10-plus years, or spreading out your investment in equal installments over a fixed time period. By determining how you will deploy your cash in advance, you can remove the emotions and market timing out of your decisions.
Don't time the market based on predictions about stocks going up or down in the coming weeks or months. It's better to embrace the wisdom of the many successful investors who credit much of their success to avoiding market timing altogether.
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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short December 2020 $210 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.