Every 4 years, we take a look at how the presidential and congressional elections may impact your personal finances: taxes, investments, health care, retirement, and more. Our analysis is intended to be non-partisan and focused on helping you plan today for potential scenarios and outcomes.
- Uncertainty makes some investors get out of the market and make other hasty moves.
- To combat anxiety, you can stress test a financial plan, which can mean running different financial plans through a multitude of market scenarios.
- Budgeting can also give people a sense of control over their finances.
- Talking through your concerns might satisfy your need to do something.
- Consider making concrete financial moves that align with your long-term plans, such as budgeting, exploring your estate planning needs, and considering strategies that have the potential to minimize taxes.
When it comes to investor anxiety in 2020, the elections are compounding fears already enflamed by COVID-19 and its impact on the nation’s health, the economy, and financial markets. The seemingly unrelenting uncertainty is causing some to get out of the market, even as it climbs, while others are paralyzed by financial decisions that ostensibly have nothing to do with the election.
"Every day, somebody will share that they feel they should wait until after the election," says Kathleen Leahy, CFP®, a Fidelity financial consultant and based in Framingham, Massachusetts. "They are asking how can they be intentional about financial planning and do it in the most efficient way, when they have no idea what's going to happen."
The feeling that more bad news is in on the way is not unusual. "People read patterns into randomness, so it sometimes feels like the next rare, bad thing is right around the corner," says Andy Reed, vice president of behavioral economics at Fidelity. He points to how people see the predictability of coin flips in the so-called "Gambler's Fallacy." If you flip heads a couple of times in a row, you're likely to think the next flip will be tails, but if you're just doing the cold, hard math, it's 50% every time.
But acting on that fear can undermine your ability to reach your financial goals. Instead, Leahy encourages people to step back, and consider their financial actions based on a full analysis of their situation, rather than what they think the next headline will be.
What does decision paralysis look like? Kelly Ballor, a wealth planner for Fidelity based in Grand Rapids, Michigan, spoke to a man recently who was terrified to make any financial moves, and said he couldn't see himself ready to do anything until January or February, at least, depending on what happens with the election and its aftermath.
"He's been in cash for 2 years, and he knows that has been a mistake," says Ballor. Heading into the last stretch before the elections, the S&P 500 Index was up more than 5% since the beginning of the year, even after a 30% drop from mid-February to mid-March. What's more, he missed out on a tremendous opportunity in March to get back into the market.
How to combat fear
One antidote to this fear can be to stress test a financial plan, which can mean running different financial plans through a multitude of market scenarios. For example, you could test run how different asset mixes would fare during different markets, based on historical performance. That can help give you a better sense of how much short-term risk you are willing to take to reach your longer-term investment goals. (For a real life example, read Viewpoints: The difference a plan makes.)
Remember, moving your investments to cash might feel good in the short term but undermine your longer-term goals. But the choice isn't between cash and something like being 100% invested in international technology stocks. You could have a moderate mix of stocks and bonds rather than sticking to low-yielding investments.
Another helpful strategy focuses on building up your emergency funds, and also getting back to the budgeting basics. Fidelity's 50/15/5 rule of thumb suggests targeting 50% of your income for essential expenses, 15% for retirement savings, and 5% for short-term savings. Fidelity regional consultant Sarah Jo Brockhouse, a CFP® based in Houston, Texas, finds this 50/15/5 rule of thumb particularly helpful to people amid a financial setback of some kind, from job loss to your company cutting its 401(k) match. When you clearly define discretionary spending, you can start to cut back.
"A budget will either give you control, because you've planned, or it puts you back in control if things have gotten out of hand," Brockhouse says.
The other side of paralysis is making rash decisions based on fear, which can make your financial situation worse.
One of the best ways to counteract this instinct is to talk it out. "Sometimes just having the conversation is the thing you need to do," says Brockhouse.
The important thing is to make sure you are talking about your long-term goals and which strategies might work to get those accomplished. "We ask things like, what's your budget for the inheritance you want to leave your children or how much do you want to give to charity? Most people, naturally, want to minimize taxes but having these answers helps develop a better strategy around defined goals and perhaps takes the focus away from uncertainty," says David Peterson, head of wealth planning at Fidelity.
You might want to explore gift and estate planning techniques, Roth conversions, and tax-loss harvesting. Kelly Ballor had a recent appointment with a man who was taking a very rational approach to his financial moves in 2020. Before the election, the 67-year-old retiree wanted to sell some of his appreciated stock in a taxable account, not just in advance of taxes potentially going up on capital gains, but because he wanted to take the profit and shift it to more favorably taxed accounts. He was using some to fund a Roth conversion and putting some in 529 accounts for his grandchildren, both of which are accounts that offer tax-free growth potential on federal taxes.
"He's not reacting emotionally. He's saying, I need to be smart to get my retirement savings into a position to better benefit me in the future. He's doing this stuff anyway, so it's not like a knee-jerk reaction to potential election outcomes. He's weighing different scenarios and acting according to strategies he's put in place for the long-term," says Ballor.
Experiencing fear, even decision paralysis, in the face of uncertainties, is common. If you're in that situation, take a deep breath and focus on your long-term goals. Consider making a budget and investment plan that can give you the confidence to weather any market turbulence. Working with a professional to test drive your investment plan and make any needed adjustments can also help.