I am hearing a lot lately that investors are “waiting until after the election” to invest cash. I get it. This election is the most polarizing in my lifetime, in all of our lifetimes. Throw in a 100-year pandemic, the expansion of mail-in voting to ensure voter safety, an almost guarantee that we won’t know results on election night, and a President who refuses to agree to the peaceful transfer of power, and we have ourselves a pressure cooker of uncertainty.
But markets rarely behave in the way a majority of us expect. Remember election night 2016? No one expected Hillary Clinton to lose. By 11:00pm, a Trump victory was certain. Stock market futures signaled a huge selloff. I forced myself to go to sleep, expecting to field calls from nervous clients the next morning. I was in the office very early that morning, and you know the rest of the story … the market opened higher and was up more than 1% that day.
Perfection is the enemy of progress. – Winston Churchill
I understand the temptation to “wait and see” what happens in a few weeks. But let’s consider two likely scenarios. In the first, no matter which candidate wins, the market climbs higher. Now what? Do you think you will want to invest then, at a higher price? Do you think the headlines will become any less anxiety inducing? If we have four more years of Trump, the media will continue to cover every misstep, mean-spirited comment, and insane tweet. If Biden is elected, the focus will be on what changes he is likely to make, including those unfriendly to investors like raising the capital gains tax.
Humans are not programmed to admit defeat. A higher market makes it less likely you will invest your cash.
In the second scenario, no matter which candidate wins, the market sells off dramatically. Perhaps the S&P 500 is down -10% in the first week, a market correction. Will you invest then? Probably not. You will be tempted to wait for a better price. Then the market really tanks. Maybe it’s down 25% by year end. You will be too afraid to invest.
Believe me, I called investors in March 2020 who were worried about the market being too high in December of 2019. None of them returned my call.
Here is the good news. You don’t need perfection to succeed at long-term investing. What you need is time in the market. The best day to invest is always today because compound returns payoff decades from now. A simple portfolio of 50% stocks and 50% bonds is up 4,500% since 1980.* An investment of $100,000 is worth $4,270,000 today. In order to get there, you had to ride out some gnarly bear markets. But they were worth it.
Sitting on cash is a drag on performance. Nick Maggiulli created the chart below, which shows the relative performance of investing a lump sum in a 60/40 portfolio versus dollar cost averaging over a five-year period. Dipping your toe in almost never outperforms investing a lump sum. The only times that dollar-cost averaging outperformed are when squiggly line on the chart below is above zero. 95% of the time, the lump sum outperforms. Why are you trying to guess when the next 5% chance will occur?
Investing is like getting in to a chilly swimming pool. Jumping in is better than trying to wade in. It’s also less painful.
Once you are invested, you have options. When the market drops, you can rebalance and buy more stocks at a lower price. When the market is flying high, trim your stock gains and buy more stability in bonds. When the market falls, harvest tax losses to offset future gains. Most importantly, next time the market falls, invest that cash sitting on the sidelines. Better yet, invest today. Perfection is a mirage. You don’t need it to succeed in investing. Perfection is a dangerous fallacy.
*Returns based on a portfolio comprised of 50% S&P 500 Index and 50% 5-Year Treasury notes that is rebalanced annually.