Don’t Mix Politics with Your Portfolio

Many Americans, both Republicans and Democrats, were worried heading into the 2020 presidential election. There were extreme feelings on both sides, with supporters of each candidate convinced that the other party’s nominee would be a negative for our country in numerous aspects, including the stock market.

With the nation divided perhaps more sharply than ever before, it’s natural to feel anxiety about America’s future in the context of political leadership. But as 2021 unfolds, there are reasons why a change in administrations need not cause such feverish financial concerns or prompt well-prepared investors to bail from their plans.

For one, vaccinations for COVID-19 inspire hope of an economic revival. Secondly, the Federal Reserve has issued assurances that it is mindful of keeping interest rates near the current low levels for an extended period, depending on when the economy bounces back to near full capacity. There is also the matter of a thin Democratic majority in Congress, making wholesale changes unlikely in terms of aggressive legislation or regulation.

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And history is on the stock market’s side, regardless of which party is in the Oval Office. Going back nearly 100 years, history shows that the political party of the sitting president has not made a significant difference in how the stock market performed over a four-year term. The S&P 500 has shown an average annual return of around 10% since its inception in 1926. And there have been negligible variations in returns during each party’s time in office.

The conclusion: Don’t mix politics with your portfolio. We believe the potential long-term growth of stocks still offers a solid investment rationale. Investors just need to learn to tune out intermittent periods of volatility, an approach that proved effective throughout the fluctuations of 2020 as the pandemic played havoc with the market, which ultimately bounced back.

Another takeaway from 2020: The market cannot be timed, and whatever the market circumstances, it’s important to know how to act and not to overreact when adjusting investments and tweaking your retirement plan. The challenges we dealt with in 2020 reminded us to implement tested principles that have stood the test of time in portfolio/financial management.

While 2020 presented a good opportunity to roll these strategies out, keeping the following basic principles in mind any time the market misbehaves can save us a lot of money, headaches, and heartburn:

Roth conversions have several factors on their side

Roth conversions are making more sense to more investors because of the current lower tax rates across all brackets. A big tax bill awaits those withdrawing money from tax-deferred investment accounts, such as 401(k)s and traditional IRAs, so it’s advisable to convert at least some of those savings to a Roth IRA and pay the taxes while the rates are low.

Withdrawals from a Roth IRA, as opposed to a 401(k), are tax-free if the account is at least five years old and the person withdrawing is 59½ years old or older.

From a timing standpoint, think about it: When the market dips significantly, it’s a good opportunity to implement a Roth conversion strategy. If your IRA is worth less money, convert at the dip and allow the recovery to occur on your money tax-free. With stocks at records right now, that means you’re going to have to bide your time … but opportunities still appear now and then.

Looking down the road, the 2017 Tax Cuts and Jobs Act expires after 2025, though Democrats and President Biden have said they may repeal some portions of the law. Many economic analysts think tax increases are inevitable in the wake of the huge government stimulus packages that were distributed to mitigate the pandemic’s effects on the economy. Roth conversions may not be right for everyone, so it is encouraged to consult with your tax advisor before making any purchasing decisions.

529 contributions never go out of style

These plans have remained popular as a college-savings tool because they have tax-deferred growth potential. With college education costs so high, a 529 can be a solid plan involving investment options. Withdrawals are tax-free when applied toward qualified education expenses.

A 529 plan can also be used in an estate plan; a contribution to a 529 is considered a completed gift from the donor to the beneficiary. Federal tax law allows people to give $15,000 to as many individuals as they choose each year, free from federal gift taxes.

As with Roth conversions, contributing to a 529 can be a good option when the market slides sharply.

Diversification remains important

Much uncertainty is ahead as the economy tries to recover amid the continuing pandemic and the distribution of vaccines. The market outlook this year is connected with the containment of the virus. Meanwhile, it’s important to remember that no single sector stays hot, so it is recommended to remain as diversified as possible.

Airlines and energy may not recover fully in 2021, but as we gradually move toward normalcy, those stocks could blossom again. Tech stocks did well in 2020 as the working dynamic changed dramatically when so many people had to work from home, but many of those people will be going back to the office. The point is to rebalance and put some money into asset classes that could be on the way back.

Time to rebuild your cash reserves

Many people depleted their savings and/or dipped into retirement savings as the pandemic swept through the country and battered the economy last year. It was a lesson to do everything you can going forward to build a solid long-term emergency fund.

One way is to reset your savings goals and divide them into short-term segments leading up to your long-term goal. For example, if you want to save $500 over a two-month period, that means basically saving $50 each week. Also, move extra money from your checking account into savings. These actions develop good savings habits.

We cannot predict what 2021 will bring, but we can make smart and careful decisions about how we will invest over the coming years. 2020 taught many of us how not to panic, how to adjust, and how to stick with the strong principles of a well-organized plan – no matter who the president is or what a pandemic brings.

Dan Dunkin contributed to this article.