Are Election Jitters Shaking Up Your Investing Strategy?

An investor looks nervous as he looks at trading numbers.

(Image credit: Getty Images)

As the 2024 U.S. presidential election looms, investors are grappling with heightened uncertainty, even as markets rally.

According to the latest Janus Henderson Investor Survey, 78% of respondents are concerned about the impact the election could have on their finances, surpassing other pressing worries like inflation, high interest rates and even the possibility of a recession. While these concerns are understandable, historical data suggests that reacting to short-term political volatility may jeopardize long-term financial goals.

It is a common mistake for political identity to fuel emotional decision-making. Many investors tend to let their political preferences influence how they view market risks and subsequently how they invest. This emotional influence, referred to as confirmation bias, leads investors to seek information that aligns with their views while ignoring data that contradicts them. In the 2024 election, this confirmation bias has manifested in a widespread tendency to take less risk until the election is decided — according to our survey, 62% of investors say they plan to do so.

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However, market data from past election years tells a different story. Historically, the S&P 500 Index has returned an average of 10.13% in presidential election years, only slightly lower than the average 12.72% during other years. This demonstrates that reducing risk purely based on political uncertainty may result in missed opportunities.

Long-term goals over short-term concerns

Many investors have already retreated to seemingly safer assets such as cash and fixed income in response to their election-related anxiety. Nearly half of our surveyed investors expressed a preference for staying in cash until the political landscape stabilizes. While cash may provide short-term security, it comes with long-term risks — especially in a falling-rate environment, which came at us faster than consensus anticipated at the last Fed meeting. As the Federal Reserve has officially entered its easing cycle, cash yields are likely to decline, and cash itself may underperform other assets such as bonds and equities.

For those unwilling to fully re-enter equity markets, fixed income can serve as a middle ground. Bonds are offering attractive yields, and their potential for price appreciation increases in a rate-cutting cycle. A barbell strategy — combining short-duration assets with longer-duration bonds like Treasuries — can balance safety with the potential for gains as rates decrease.

Despite the fear of an economic downturn, the data shows that staying out of the market until conditions feel "safer" can be a costly mistake. In fact, 55% of investors we surveyed expressed concerns about an impending recession, a worry that has led many to adopt a wait-and-see approach.

However, waiting on the sidelines often results in missing out on market rallies. Historical data shows that risk assets — such as equities and bonds — tend to outperform cash over the long term. From 1996 to 2023, balanced portfolios consisting of 60% equities and 40% bonds significantly outperformed cash on a rolling five-year basis.* Furthermore, markets tend to recover rapidly from short-term volatility, and missing the initial phases of a market rebound can have a detrimental effect on long-term portfolio growth.

Taming FOMO with diversification

While many investors are reducing risk, some are leaning heavily into sectors they believe offer attractive short-term gains. Our survey showed that 73% of respondents see technology as a strong investment opportunity over the next year, driven largely by the hype around artificial intelligence (AI). The Magnificent 7 stocks — tech giants such as Apple, Microsoft and Nvidia — have garnered significant attention. However, this FOMO (fear of missing out) can lead to an overconcentration in tech stocks and a lack of diversification, with 44% of surveyed investors preferring to focus solely on these names instead of maintaining a diversified portfolio.

While AI presents an exciting long-term investment theme, investors should be wary of overexposure to a single sector. History has shown that diversification is key to managing risk and achieving sustained portfolio growth. Sectors like health care, which also benefit from innovation, offer a counterbalance to tech while still providing potential exposure to the AI revolution.

The 2024 presidential election has created significant anxiety for investors, but reacting too strongly to short-term political events can be harmful. History shows that factors like interest rates, inflation and corporate earnings play a far greater role in long-term market performance than election outcomes. By staying invested, maintaining a diversified portfolio and focusing on long-term goals, investors can navigate this period of political uncertainty without sacrificing their financial future.

* Source: Bloomberg, as of December 31, 2023. Average of five-year annualized rolling returns based on calendar-year returns. A 60/40 balanced portfolio is a combination of 60% S&P 500 Index and 40% Bloomberg U.S. Aggregate Bond Index and assumes annual rebalancing. Past performance does not predict future returns.

The opinions and views expressed are as of the date published, are subject to change and may not reflect the views of others in the organization. They are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. There is no guarantee that the information supplied is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use. W-0924-796352-09-15-2025

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Matt Sommer is a Managing Director and Head of Specialist Consulting Group at Janus Henderson Investors. His team consists of various subject matter experts across several disciplines, including retirement planning, wealth advisory, practice management and investment strategies. They provide clients actionable insight and expertise they can implement into their business practice to retain and gain clients. Prior to joining Janus in 2010, Dr. Sommer spent 17 years at Morgan Stanley Wealth Management and its predecessors, Citi Global Wealth Management and Smith Barney, during which time his roles included director of financial planning and director of retirement planning.