Don’t Take Election Stress Out on Your Investments

Don’t Take Election Stress Out on Your Investments

In the wake of the election, heightened emotions could lead some investors to act “in the heat of the moment” and make personal financial decisions that “prove costly.” This according to a recent article in The New York Times.

For those who study behavioral finance, which focuses on how emotions affect financial choices, this is no surprise, the article adds: “For Americans grappling with a pandemic, social unrest and electoral uncertainty, this year has been a petri dish of anxiety, angst and decisions based on fear or folly. “

The article cites comments from Dan Egan, director of behavioral finance at roboadviser Betterment: “We don’t have well-organized compartments in our brain for how we feel about circumstances. We often get strong emotional leakage from one side to another.” Such behavioral bias, he explains, has worsened leading up to the election, with people believing that if their side wins, it’ll be great for the economy. But Egan argues that no matter which side you’re on, things are not likely to be as good or as bad as you may believe.

The article outlines some cognitive biases that have affected investors’ decision-making this year and others that are likely to emerge around the election:

  • Extrapolation bias: When people give added weight to current events in the belief that those events will continue. The article describes the example of inexperienced investors who, if they started investing this past spring, would have felt like “hedge fund stars” as they rode the rebound from the March low. “But if those investors think their returns are the result of immense skill and not a bit of good market timing, they could suffer mightily in a market correction.”
  • Availability bias: The more you see information repeated, the more you think it will be true in the long term—without considering other potential outcomes.
  • The Disjunction Effect: People want information to be revealed before they make a decision, even if they would make that same decision with or without the information. Egan cites the example of election results, noting that if someone’s preferred candidate doesn’t win, they might look to sell large portions of their portfolio—to “detrimental” effect. He says his firm explains to clients, “You would need the candidates to have radically different policies to cause harm. And there isn’t that big of a difference between candidates that would have short-term impacts on the stock market.”

Since these biases are hard-wired into our brains, it can be difficult to combat them, the article notes, suggesting that investors can start by returning to their financial plans and “analyzing how a sudden drop in your portfolio’s value might affect you next year or 10 years from now. Then, in an anxious moment, write down what you’re thinking and feeling. This will be valuable to return to later, when chances are your worst fears did not come to pass.”

Scott Clemons, chief investment strategist at Brown Brothers Harriman, puts it this way: “In the new year, everyone will say they knew a Biden or a Trump victory is good for markets, or it was bad for the markets. But no one knows anything right now.”