Election workers open mail in ballots at the Maricopa County Tabulation and Election Center in Phoenix on November 11, 2022.
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It takes until December to know which political party control both chambers of Congress after Tuesday’s midterm elections.
But that doesn’t mean your personal investment strategy has to remain up in the air either.
As uncertainty in the results of several key races looms, the future results will not lead to a big market reaction, according to Dan Egan, vice president of behavioral finance and investment at Betterment.
“We still effectively have a balanced government, which is actually something that is common in the market,” Egan said.
In the notes on the midterms published this week, UBS also signaled the result could be positive for the market.
“Regardless of the final outcome, we see a divided government, which increases the chance of gridlock and limits legislative action,” wrote Solita Marcelli, Chief Investment Officer of the Americas at UBS Global Wealth Management.
“This is usually good for the market because it reduces policy and regulatory risk,” he said.
Investors who try to read the leaves about what one party or another control can mean for the future return on the stock may be in for disappointment.
A portfolio of 60% stocks and 40% bonds tends to do the same regardless of which party holds office, research from Vanguard has been found.
Yet many investors tend to suffer from biases that the other team or the winning party is bad, according to Egan.
“The more partisan an individual is, the more likely they are to say if you’re a Democrat or a Republican, ‘Well, the stock market is going to be bad because the economy is going to be bad,'” Egan said.
That could lead those same investors to reduce the amount of risk they take, regardless of whether there is a real reason to do so, he said.
To combat that reaction, it can help to share.
“Remember how little control a set of politicians has over the stock market or the economy in general,” Egan said.
What’s more, if you take investment risk off the table in response to earnings, you may miss out on market upside.
The S&P 500 Index tends to beat the overall market in the 12 months after the midterm elections, with an average return of 16.3%, according to a US Bank Analysis.
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The midterm polls – which decide the Senate, House and ballot initiatives – can be a good preparation for the presidential election.
“It’s the junior varsity game before the varsity game, at least in terms of thinking about how you feel and feel during the election cycle, especially when it comes to investment decisions,” Egan said.
Investors may want to start thinking now about key themes that could be affected by the election that could affect their personal finances, such as proposals to reduce state and local tax deductions, for example.
“Don’t think about politicians; think about policy,” Egan said.
In addition, it helps to plan in advance what you will do based on the hypothetical outcome.
Three weeks to a month before the next election, imagine the scenarios that could happen on election day and how you would change your portfolio.
Then, set a reminder to revisit that plan in the week before the draw.
As a result, you’ll have a plan you can follow when you’re calm, Egan says.
Once the sound starts coming in, it also helps to keep the distance, so you don’t get caught up in the moment.
“You’re probably better off in terms of your recovery and your stress level if you try and tune out and do something else instead of paying attention at the time,” Egan said.