Will the stock market have negative returns for the last half of 2016 since it’s an election year?July 10, 2016
I often hear what people are or aren’t going to do because of the election. Business owners holding off on spending capital. People prolonging retirement, waiting to invest, or not investing in the stock market. These are a few of many examples of what people do because it’s an election year.
The one I will focus on for this article is how people wait to invest or don’t invest in the stock market because of the election year and how that can affect your retirement. People are concerned that the election year will negatively affect the stock market and it becomes a factor in how the plan. So what has happened in the stock market in past election years? The charts below illustrate the S&P 500 dating back to 1960 using the opening value of the index on July 1st of the election year and the opening value of the index January 1st of the following year. This represents the last six months of the past fourteen election years.
In the last fourteen election years the S&P 500 only had two negative years in the last half of the year; 2000 and 2008. We are also well aware of the fact there were other things were happening in those years besides the election. 2000 was the “dot-com bubble” and 2008 was the “financial crisis”. Based on past election years there is no warranted argument to be concerned with negative stock market returns for the remainder of 2016 merely because it’s an election year.
Decisions about investing and retirement should be made on sound financial planning, logic, and goals. Your decisions should be made on things that you can control. Things like: taking a bit of time to commit to planning, what amount of risk your taking with your investments, and how much you are investing.
Many people have concerns about retirement such as having enough to retire, health insurance costs, and stock market volatility. Waiting to invest or plan for retirement because of the election year will only make this worse. The sooner you start planning for retirement the better off you will be. One of the main reasons for that is the power of compound interest. If you would wait 5 years to start investing $5000 a year, assuming you earn 5% interest, over a 20-year period you would have $59,000 less. Go to this calculator from Smartasset to find out how much more you could save until you retire. https://smartasset.com/investing/investment-calculator Sometimes you will hear that compound interest is the eighth wonder of the world. $100,000 invested at 5% earning simple interest would earn $50,000 in interest over a 10-year period. $100,000 invested at 5% earning compound interest would earn $62,889.46 over a ten-year period. Here is a quick video from Investopedia that does a good job explaining the basics of compound interest. http://www.investopedia.com/terms/c/compoundinterest.asp
Having a plan and taking action can help to reduce uncertainty about retirement. Here are three simple steps you can take to save a bit more for retirement and create a more solid retirement plan. Maybe you are confident that you will have enough money long term but you are unsure about health insurance costs if you retire before you are eligible for retirement health care benefits. Maybe you desire to have money set aside for a remodel project at retirement. These steps will help in numerous situations.
Schedule a time. This simple task is so often overlooked not only as it relates to financial planning but others areas of life. Life as we know it today is very busy. Many things can get in the way and we can easily lose sight of what’s most important. Don’t put it on a to-do list but rather schedule it on the calendar. If you are planning with someone else communicate that time with them. Write it down for a specific date and time-Saturday morning at 9AM.
Set a yearly goal. If you are 63, want to retire at 64 and project your health insurance cost to be $12,000 from 64 to 65 your goal would be to save $12,000 over the next year. If you want to remodel your kitchen three years from now and the cost will be $30,000 the yearly goal will be $10,000.
Automate savings. Before you can automate savings you will first need to determine the monthly amount. If your goal is $12,000 per year that equals $1000 per month. One way to automate savings is to set up a specific savings account with your bank for this goal and schedule a monthly transfer from your checking account. Another way would be to set up an investment account with a provider like TD Ameritrade https://invest.tdameritrade.com/grid/p/accountApplication for longer term goals. Once you have the account set up you can automatically make monthly investments from a savings or checking account.
As humans we are wired to procrastinate. The election gives us one more reason to procrastinate. These steps are very simple but if used can be highly powerful. It doesn’t have to be complicated to be effective. To get some real results keep it simple. Schedule a time, set a goal, and automate savings.