In this week’s episode of Retire in Texas, Darryl Lyons, CEO and Co-Founder of PAX Financial Group, dives into the topic of market volatility surrounding elections and how investors should approach this unique time. With historical insights and practical strategies, Darryl explores how election cycles affect the stock market and why it’s essential to stay calm amidst the noise.
Through an engaging discussion, Darryl highlights the importance of maintaining a long-term mindset and avoiding emotional decision-making during times of market uncertainty. He also shares four key pillars that can help guide investors through the volatility, offering a clear framework for navigating election-related market swings.
Key show highlights include:
- How elections impact stock market volatility.
- The importance of thinking like a business owner when investing.
- Why objectivity over emotion is critical to long-term financial success.
- Insights from past elections, including market movements in 2016 and 2020.
- Practical tips for aligning expectations with your spouse and advisor to stay on the same page during market fluctuations.
Transcript:
Hey, this is Darryl Lyons, CEO and Co-Founder of Pax Financial Group. And you’re listening to Retire in Texas. This information is general in nature only. It’s not intended to provide specific investment, tax, or legal advice. Visit www.PAXFinancialGroup.com for more information.
Also go to PaxFinancialGroup.com and click on the Contact Us button. And you’ll connect with a financial advisor with the heart of a teacher. And it’s a 15-minute consult just to see if it’s a good fit. It’s not a fit for everyone, we get that, but we’re willing to have that dialog. So, this conversation is about a little survey I saw just the other day.
It’s just a small survey. I’ll put a link in the show notes, but it said that 75% of people aren’t changing their investment strategy for the upcoming election. 75% of people are not changing their investment strategy for the upcoming election. But are you, or should you? I mean, we are living in some very unusual times, as you know, and I’m going to give you some historical information.
But I remember more than a handful of clients. I would give them historical information, and they would look at me with skepticism and say, I throw all out the window because these times are completely different. And I do get that. Absolutely. But at least let’s see what history says and then draw conclusions based on historical evidence. And even in the context of today’s craziness, historically, there hasn’t been a huge dip in the markets before elections.
There hasn’t been this, hey, there’s a big market crash that happens before every election, so pull out and then come back in when it’s resolved, that evidence does not exist. But let’s think of things in terms of volatility. There will be money managers shifting money around as they get visibility or probabilities of various outcomes. That shift in portfolios leading up to the election, even for retail investors, will cause some market volatility, a crash historically that hasn’t happened.
Market volatility. Yeah, since 1932, the Chicago Board Options Exchange volatility Index. And we call this the VIX. You’ve heard me talk about the VIX before has risen nearly 10% on average in presidential election year versus non year. So, all that’s saying is yeah there’s been a little bit more up and down in the movement of the markets. But that goes back to 1932.
Let’s just look at recent elections. 2016 is a good one to look at. The stock market is traded overnight as well. And we call that the S&P futures. You might have heard that in the 2016 election it dropped 5% pre-market. And once the market opened the following morning, the election day the S&P went up 1%. Then over the next month it went up 5%.
But imagine that before Election Day having a 5% drop in the overnight markets. And so, you’re watching this. That drop creates a lot of fear. And that could happen. So just be aware. You might see what we call, overnight trading, be volatile. But based on 2016 that happened. And then it stabilized the next morning. So just know that that’s a possibility now, 2020 we could look at that and say can we learn anything from that.
In 2016 we learned that the futures markets had volatility, but it didn’t translate necessarily into the normal market. Now 2020 was quite different. As you recall, the election was contested. And really, we were also recovering from a 30% market drop in March. So that one was obviously a very different year with Covid. But generally speaking, you don’t have a lot of volatility that leads to dramatic decreases.
And I’m trying to say this carefully, a lot of volatility that leads to dramatic decreases in the stock market. But you might have higher frequency as people are moving money around. Now this all changes. I gave you the historical context. But think about it this way. We have new information age algorithm trading, global unrest, weather patterns. I mean there’s just a lot going on.
So, I wouldn’t be surprised if we see some swings. I just wouldn’t. And I think that’s part of the way I’ve been training myself for the last 20 years. I want to share some of those things that I’ve learned with you, to try to help navigate your mindset coming into the election, because 2016 is a good litmus test, how you can have little snippets, even a framework of a few hours of craziness that could totally freak all of us out.
So, I’m going to share with you how I look at this, and let me give you four pillars that we use in our investment strategy to help you navigate this upcoming election time. Number one, ownership matters. It’s very important for you to remember that when you buy a stock, you don’t just buy a stock, you own a piece of a company.
You own a piece of AT&T. You own a piece of Google, you own a piece of Facebook. Well, I don’t know about those companies that you would want to own those, but you own a company that’s not going bankrupt, the day after the election. They will still be around, and you will still go to Discount Tire. You will still use toilet paper.
You’ll still go to H-E-B and get groceries. There will be plenty of companies still operating and functioning, and you will benefit from that because you’re still an owner. That has not changed. So sometimes we think the market is this nebulous world of computers and stuff, and it’s really you own a piece of company. I was talking to my daughter.
She was doing a $500 investment, her first investment in portfolio I filters like about time to try to get her acclimated in. The first investment that we’re doing is in Pilgrim’s Pride. Now, I did some research and that one made sense for her, but I said, we’re going to invest in chicken. That’s what we’re going to invest in.
We’re going to invest in a company that does chicken. I wanted her to just know that when chicken is selling around the world and people are eating chicken, she, as an owner of a company, is going to do well. And I just want you to think the same way you own companies. And sometimes we forget that. And you even if you own a fund and there’s two different types of funds, the mutual funds and the exchange traded funds.
A lot of people own funds inside of those funds. You own companies. So, owning companies doesn’t necessarily change with an election. I mean, there’s some dynamics that are going to play out over time, but they’re still going to be around. So that’s number one is just remember you own companies. In fact, if you look historically, I’ll put this data again in the show notes six months after the presidential election going back to 1996, if you owned small company stocks that had about 11% return, six months after an election and large company stocks had about almost an 8% return.
So, when those are pretty darn good returns six months after an election, companies can generally do well after the elections and namely because the market likes clarity and now they have clarity. The market actually, if it’s hoping for anything, y’all, it’s hoping for some type of gridlock. I hear it all the time. I feel like I’m pretty engaged in what’s going on in the markets.
And they like the idea that there’s a Democrat Senate or a Republican Senate, a Democrat president or some combination. They want this whole political game to be gridlock. The market can do what it does. That’s probably the most favorable outcome for the market. But regardless, once it gets clarity, then you start seeing companies do real well, at least the stock price of those companies historically.
The second thing. So, the first thing is for you to remember that ownership matters. The second thing I want you to remember is you’ve got to have objectivity over emotion, objectivity over emotion. And I’ve spoken ad nauseum about behavioral finance. And there’s this thing, it’s a pecan, but is it pecan or pecan or pecan? Regardless, you have this little thing shaped in your brain called an amygdala.
When that thing gets hijacked, the game is over. And so that happens when you see the headlines that the market’s crashing sometime around the election. And it kind of freaks you out, and then you’re unable to suppress your emotions. And you call our advisors, you call your advisor, or you go online and you hit the sell button. I do not want you to do that at all.
And you just have to know that that exist. Now, there’s this one analyst that I saw, and actually he was a fund. I think he’s a fund manager. Doesn’t really matter. And he said this there. So what do you think about the election volatility coming up, or what do you think about the ill? I don’t remember the question doesn’t really matter that much, but yes, what do you think about the election and stocks coming up?
And here’s what he said. I think it will be a fun time because there will be a lot of opportunity. I think it will be a fun time because there will be a lot of opportunity. In other words, volatility is coming and he’s going to go shopping. That’s exactly what he’s saying in Wall Street words. Volatility is coming and I’m going shopping.
But what he’s doing is he’s taking the emotion out of it. And I want you to do the same thing because that’s how people win with investing long term. They are objective not emotional. Number three speaking of long term, those people that navigate through these elections think long term. And I think whenever you own a company, you have to think that way.
When you own a company, like having ownership of PAX, you just go through seasons where the company’s not doing that good, and it’s not necessarily bad. I mean, if a company is less profitable, it doesn’t mean that it’s doing bad. Sometimes companies take their profits and take their cash and make investments in technology. So that way, 5 or 10 years down the road, they’ll be healthier companies.
They acquire another company and use cash or debt to acquire that company. And in the short term, it doesn’t look good. But long term it works out real well. Sometimes companies have layoffs and things happen, and sometimes there’s seasons when they’re out of favor. It’s ridiculous for us to freak out when we see the seasons. I prefer if possible, and it’s hard to do, and you have to have a life.
But every now and again I get on these publicly traded calls. You can too, and just listen to the CEOs of these companies and just kind of listen to what they’re doing in an environment where their stock might not be performing. Sometimes you’re being sold, but you can hear, hey, I know our stock’s down, and I know our profits down, but we’re using that cash to reconfigure our whole distribution line.
So that way we could be more profitable down the road okay. That makes sense to me. But you go through these seasons and if you’re thinking short term and you see the stock price go down and you freak out, that’s how people lose money. And I don’t want you to lose money. So, number three, long term thinking during this season of the is very important.
Number four we call these pillars, four investment pillars. The fourth pillar is to make sure you align your expectations with everyone else. So, what do I mean by everyone else. Well, it’s important that you and your spouse get on the same page and just have a strategy of how you’re going to approach market volatility. Are you going to freak out?
Am I going to freak out? Will we recognize we’re in this thing long term? I do know that sometimes spouses can freak out and that puts a lot of stress on the family. I’ve seen that over the years. So, I just want you to get in front of that, making sure you’re on the same page, and then also working with your advisor, whoever is managing your portfolio and making sure that your portfolio is aligned with your expectations.
The last thing that you would want is to think, oh, you know what? Our portfolio is going to go down that much because we’re all in bonds. And then you go to your advisor and say, wait, I thought we were, but why is it down 50%, that you’d never want to happen. So just make sure that you and your advisor are all on the same page.
And you could do these stress tests on your portfolio to say, okay, what if the market goes down 50%? Just making this up. I don’t think it’ll happen. Rarely happens. It does, but it rarely does. And just say, I want you to stress test it for me and just make sure we’re all on the same page. All three of us are spouses.
If your kids are involved and your advisor making sure we’re all on the same page, I one time had a client come up to me and said, you know, my expectation was that you were going to be a Warren Buffet and make me rich. I was like, that is missed expectation. First of all, you’re already rich. So, if anything, my job is to keep you rich, not to make you rich.
And so, we had to reset expectations because that’s just not the role I play. And so, make sure you understand the role of your advisor and how they’re going to work with you, and then make sure you and your spouse are on the same page. So again, kind of going back to this idea of what you’re going to do with your money, 75% of the people out there said, I’m not going to do anything different.
And I think that’s right. But I also want to make sure you’re mentally prepared just in case, just in case there’s heightened volatility. And the way you can do that is you can lean into the four pillars we use as we build out portfolios and manage people’s money. And number one, ownership matters. Think like an owner. Number two, be objective over emotional.
Number three, think long term. And number four, align expectations with everyone. I think if you can do those four things, you’ll navigate through this election uncertainty with your investment portfolio just fine. Continue to pray for our country. Continue to be a friend to your neighbor and remember you think different when you think long term. Have a great day!
Resources:
Election Market Volatility in 4 Charts (moneyandmarkets.com)
The Relationship Between Elections and Volatility – OpenMarkets (cmegroup.com)
2024 elections: policy shifts and portfolio construction views (nuveen.com)
Tune in to learn how to prepare your portfolio for the upcoming election and beyond. For more resources, visit http://www.paxfinancialgroup.com. If you enjoyed today’s episode, don’t forget to share it with a friend!
Disclaimer: Clicking the Like button does not constitute a testimonial for, recommendation or endorsement of our advisory firm, any associated person, or our services. Clicking the Like button is merely a mechanism to circulate our social media page. “Like” is not meant in the traditional sense. In addition, postings must refrain from recommending us or providing testimonials for our firm.
Resources:
Election Market Volatility in 4 Charts (moneyandmarkets.com)
The Relationship Between Elections and Volatility – OpenMarkets (cmegroup.com)
2024 elections: policy shifts and portfolio construction views (nuveen.com)
Listen on:
