The market doesn’t play politics, but it does vote against uncertainty. On election night, as the returns began to suggest an upset victory for Donald Trump in the race for U.S. president, global markets plunged and Dow Jones industrial average futures fell 800 points.
But the sell-off was short-lived. Global losses quickly trimmed in the early morning hours, after Hillary Clinton telephoned Trump to concede and Trump made an uncharacteristic call for unity in his victory speech. The U.S. markets opened down on Wednesday before quickly rallying, and the Dow and the S&P 500 continued to climb steadily through the day, with both closing up over 1%.
“In typical market fashion, there was an immediate overreaction, and then cooler heads prevailed and the markets reverted back to market and economic fundamentals,” says John Gajkowski, a certified financial planner with Money Managers Financial Group in Oak Brook, Illinois.
A postelection reality check
This campaign was unlike any other, and the market’s positive reaction to the results doesn’t quite track with history, either. The markets more frequently lean toward a sell-off on the day — or in some cases, in the days — after an election. According to Bespoke Investment Group, the S&P 500 has posted a negative return after the polls closed in 15 of the previous 22 elections.
However, single-day returns are rarely indicative of long-term results: LPL Research says the S&P 500 posted gains between Election Day and Inauguration Day in 11 of the past 16 elections, with a median return of 3%.
And it’s possible that this market may continue to behave in unexpected ways.
Yet no single market event, good or bad, changes the single biggest piece of advice for investors: The best reaction is often no reaction. If you do nothing today, and in the weeks and months that follow, history tells us you’re likely to come out ahead of investors who let uncertainty dictate a change in their strategy.
Doing nothing is easy if the market continues to rally. If it doesn’t, it becomes much harder than it sounds. Here are three things you can do to insulate yourself from market madness, whether or not things go in your favor.
1. Stay in the game
The market rewards investors who can ride out volatility, and it will continue to do so. Put a pillow over your ears, chuck your TV, close this browser window — do anything that will help you avoid turning market news into a snap reaction.
“In the long run, the market is not dependent on Trump,” says Chris Chen, a certified financial planner with Insight Financial Strategists in Waltham, Massachusetts. “Whatever positive or negative that he will inflict on the economy, the U.S. economy is strong, and it will be healthy in the long run.”
If you want to benefit from that strength, you not only need to stick it out but continue to save. No, it’s not a cutting-edge idea. But it’s been proven to bail people out of even the toughest times. Save more than you saved last month and the month before, if you can. (If you don’t know how much you should be saving, a retirement calculator can give you a quick answer.)
Investment returns are important, but they’re not possible without the money you contribute. In a winning market, that money will earn a bigger return. In a sliding one, you get an opportunity to buy in at a discount.
2. Revisit your long-term plan
Here’s what you’re likely to find: Nothing has changed. You still have the same goals. They’re still the same number of years away. Unless you need the money you have invested soon, market swings are a short-term blip on a long-term investment plan.
What may have changed is your ability to tolerate those blips, as that tolerance has been through a string of tests in the past year. If those tests are truly shaking your resolve, it may be a sign you’ve chosen investments that exceed your risk tolerance. Or maybe you didn’t choose them at all; a long-running bull market can throw your equity allocation higher than you’d prefer, especially if you haven’t been keeping tabs.
If it keeps you from panic selling, rebalancing your portfolio is the exception to the do-nothing directive. But that doesn’t mean you should go in and dump all your stocks in a single day, or at all. Instead, slowly shift your allocation toward a more comfortable mix by directing your future contributions into safer investments like bond funds.
3. Control what you can control
If your candidate didn’t come out on top, you may be feeling like that isn’t much — and when it comes to the stock market, you’re very much right. But just as the president can’t fix your finances, he can’t break them, either. On the other hand, there’s plenty you can do to improve and stabilize your personal economy, including:
- Paying down high-interest debt.
- Taking advantage of continued low interest rates, as the Trump win may throw December’s forecasted Federal Reserve rate hike into question.
- Saving more in tax-advantaged accounts like a 401(k) and a traditional or Roth individual retirement account.
- Building up an emergency cushion, even if bit by bit.
- Learning about coming policy changes and how they might affect your finances.
If none of that calms you, recent history might. After Brexit — another unexpected vote that raised market fears this year — the market made up losses inside of two weeks. And in the weeks and months that followed, it posted a string of record highs.