By Dana Anspach
Orlando Sentinel via AP
Election years are scary. Many people feel the future of the country is hanging in the balance. Drama dominates the news, and social media intensifies it. Emotional spikes are the norm. Add to that a global pandemic, and you have the catalyst for the type of behavior that leads to the self-destruction of carefully planned portfolios.
What behaviors cause a portfolio to veer off track? Well, I’m not a golfer, but I know enough to realize I wouldn’t use a putter for my long-game. And for many, retirement is a long game of 20 to 30 years, maybe more. In life, the games don’t get much longer than that. You can raise a child in less time than retirement may last.
When you build an investment strategy for retirement, ideally, you match your investment approach to the length of time it needs to last. You won’t consume your entire portfolio at once, so you choose drivers for a large portion of it. A driver is the type of golf club used to get the ball as far as possible toward the green from a long distance. While playing golf, you may be swinging from 200 yards; when investing, you’re swinging for 10 to 20 years into the future.
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There are numerous long-term investment approaches, or drivers, that are likely to work well for a 20 to 30 year retirement time horizon — but they may not work at all if you interrupt their progress along the way. It’s like using a driver on the first through the fifth holes, then a putter for the sixth, then back to drivers, then back to a putter for the 13th.
How well do you think that game will go?
Most people invest carefully for retirement. It’s money you must be able to count on. Sure, you may have a small account where you day-trade or buy a few random stocks you love. But are you that nonchalant with your retirement portfolio? Hopefully not.
Then, election year rolls around. As emotions run across a broader range of the spectrum, suddenly, it seems like applying a short-term trading strategy to your long-term money makes sense. And thus, it is that every four years, I watch normally very rational long-term investors become unhinged and apply short-term thinking to their retirement portfolios.
It might work. You might get lucky. Perhaps you can call who will win the election, what the markets will do, sell, then buy, at just the right time, to outperform what would have happened if you had remained invested with a long-term strategy, eyes focused on where things could be six, seven or eight years in the future.
Yes, you might get lucky. And you might not.
For investors who are considering changing approaches because of the election, ask yourself, what game are you playing? And do you have the tools and knowledge set to play that game well?
For example, consider tactical asset allocation funds, where they “aim to deliver better absolute or risk-adjusted returns than static allocation funds by deftly switching exposure among asset classes.” How successful are they? According to Morningstar, tactical allocation funds don’t deliver .
Professionals manage these funds with a wealth of technology tools, research, and staff at their disposal. Yet, they are not able to outperform a long-term strategic allocation approach.
Strategic allocation is a strategy used to determine what percentage of your assets to place in various asset classes according to your goals and risk tolerance. Then you rebalance as needed, with no need to shift things around based on current events. It’s rather dull. It’s also rather effective. It requires mental discipline and the ability to set your emotions aside, or at the least, disconnect them from your portfolio decisions, during volatile times.
Setting emotions aside is easier said than done. We are humans, not computers, which is why it is more important than ever that you know what game you are playing. I am not a good golfer. I don’t enjoy it, and when I’ve tried it, I’m horrible. Then again, I’ve never put any effort into learning. But I’ll go out with friends for the camaraderie. I am clear about the game and how well I don’t play. Investing should be the same. Be clear about what you are doing and why.
If you don’t like risk, better to maintain a more stable portfolio than try to time your risk decisions around events like the election. If you are a day-trader, and good at it, trade away. If you’re a tactical allocator, and good at it, keep at it. And if you’re playing the long game of strategic allocation, before you try to election-proof your retirement by changing games, consider that your long-term approach may be the strategy that is already perfectly aligned to your retirement goals.