3 Mistakes Investors Make During Election Years

The US Presidential Election 2020 is near and often this causes anxiety for many retail investors. And we all know when our emotions are in play, we tend to make many stupid and unnecessary mistakes.

Today let's touch on the 3 Mistakes Investors Make During Election Years in hopes that you will be aware of them, and more importantly not fall for them.

#1 - Overanalyzing which party will win

It's interesting to follow and dip our toes into forecasting who's gonna win this coming election - Biden or Trump. And you might even have your personal preference on who you favour as the upcoming US President.

But while we can do all the analysis and prediction, as traders and investors, we always follow the mantra that “the market is always right”.

If we were to look all the way back to 1933 when Franklin D. Roosevelt took the presidential office to date, the stock market (S&P 500) has trended higher regardless of which party has been in office.

So while some of us gonna have our own side bet on who's gonna win this election, don't forget to also keep your bet on the stock market

#2 - Too worried about volatility

Markets hate uncertainty, and that causes volatility. There will certainly be higher volatility in the market this coming election, and it's definitely very important that as traders and investors, we are aware of such volatile seasons and take precautionary measures.

But at the same time, it is also because of such volatility, opportunities arise in the market.

“When everyone is worried that new government policy is going to come along and destroy a sector, that concern is usually overblown,” Lovelace says. “Companies with good drugs that are really helping people will be able to get into the market, and they will get paid for it.”

The key here is to seek out these opportunities and manage our risk accordingly.

#3 - Trying to time the market

According to Morningstar, since 1992, investors have poured assets into money market funds much more often leading up to elections. By contrast, equity funds have seen the highest net inflows in the year immediately after an election.

This suggests that investors may prefer to minimize risk during election years and wait until after uncertainty has subsided to revisit riskier assets like stocks.

However, the results haven't been favourable to them. According to historical statistics, these investors tend to underperform when they try to time their investment around the elections.

To capitalize on this, look to position yourself ahead of the herd. And when these retail investors re-invest back into the equities market, they will be providing the demand force that pushes price higher.