Wondering how the election could impact your 401(k)? Here’s what you need to know

If you find yourself wondering how the economy — and your money — will fare in the upcoming election, you're not alone. We recently conducted research¹ to uncover which issues are most important to voters in this upcoming election. Seven out of 10 said the economy was one of their top concerns, and placed inflation at the top of the list of economy-related issues, followed by taxes and job security. Individuals closer to retirement age prioritized the economy significantly more than younger voters.

With the number of Americans invested in stocks back up to peak levels from before the 2008-09 financial crisis and with U.S. retirement investments cresting $40 trillion for the first time, many are wondering how to navigate their portfolios through the upcoming election and inauguration.

How have markets historically fared during election years?

First, let’s review some historical data to get a clearer picture of how markets have behaved in previous election years.

Analysis from JP Morgan & Chase looked at annual returns for the S&P 500 between 1928 and 2023 and found that non-election years have had slightly higher returns than election years (8% compared to 7.5%). Yet, as the analysis noted, “After polling results are announced and the uncertainty dissipates, stocks have tended to rally. Looking at 40 years of Election Days, stocks have been higher, on average, one year later.”

Vanguard analysis found “no statistical difference” in the performance of a non-election year compared to an election year using a scenario with a diversified portfolio more akin to a retirement account — 60% equities and 40% bonds. Lastly, analysis from BlackRock shows that time invested in the market, not the political party in the Oval Office, tends to have the most significant impact on investment returns.

Markets never like uncertainty — and what could be more uncertain than a competitive election with candidates with starkly different positions and values? This means that some market volatility is likely in the next few weeks and months. However, historical data shows that this volatility is usually short-lived and evens out over longer periods.

What does this mean for your investments?

Election seasons can cause noise and uncertainty, but staying committed to your long-term goals can help keep you grounded. Here are a few strategies to navigate the ups and downs this election season.

Shore up your emergency savings

With job security ranking high in the minds of many voters, a good practice is to establish enough cash savings to cover several months of living expenses with no paycheck. With the Fed recently cutting rates by 0.50%, it is also a good time to check the yields on your short-term savings and confirm you are receiving market-level rates.

Rebalance if needed

With the S&P 500 up significantly over the last two years, investors who haven't rebalanced could be overweight U.S. stocks relative to other major asset classes like U.S. Bonds and International Stocks. For investors in automated portfolios like Guideline's six managed portfolios, rebalancing is typically built-in.

Stay the course and keep investing

At Guideline, our philosophy is to stay the course with your long-term investing goals. With a 401(k) plan, you are investing for the long term, which means your portfolio will see several election and market cycles over decades.

So, having a plan to continue investing regularly into your retirement through payroll contributions rather than trying to cherry-pick certain times to invest or hit pause can be key. By doing so, you utilize the power of dollar-cost averaging — investing a fixed amount of money at regular intervals over a long period.

If you're still feeling uncertain, take a moment to assess whether you're taking on more investment risk than you're comfortable with. Reducing your risk slightly could be a great first step. For example, if you are in an 85% stocks / 15% bonds retirement portfolio, you could downshift that to 75% stocks / 25% bonds. If you make a change like this, it may be a good idea to remain in the new portfolio versus trying to time the market, which tends to hurt investors over the decades.