5 Tips to Help You Prepare Your Portfolio for Midterm Elections
Midterm election preseason is a good time to see if your risk tolerance and long-term objectives are still aligned, not to make big changes to your portfolio.
Election season can turn even levelheaded investors into political strategists. New polls, fresh candidates, hot debates and updated predictions about which party will control Congress can all seem like reasons to make drastic portfolio changes.
Following such impulses is usually a mistake. "I regularly remind investors to save politics for Thanksgiving dinner; they have no place in an investor's portfolio," says Marta Norton, chief investment strategist at Empower.
The trouble is that it's easy to assume the political party you prefer is also the best one for markets, Norton explains, even though earnings and valuations, as well as interest rates and inflation, all have much greater influence on markets over any meaningful term.
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History shows midterm years are more volatile. The data also says they tend to produce strong rebounds once results are in. According to BlackRock, the S&P 500 has posted an average gain of 14.1% in the six months following midterm elections since 1970.
So preparation does matter. But it's not about predicting a winner. It's about returning to what really determines long-term investment success: your financial plan, diversification and fundamentals.
Here are five tips from experts to help you prepare your portfolio for midterm elections.
1. Let your financial plan, not your politics, guide you
When you hit traffic on a road trip, you might take a detour. But you don't abandon your map and your destination. You can think of midterm-related market volatility the same way.
When uncertainty rears its menacing head, D.A. Davidson Vice Chairman Andrew Crowell says to "trust your financial plan. A good financial plan should be able to sustain some volatility and keep you focused on future goals, no matter the outcome."
Even with increased volatility, midterm years are generally good for market returns. Since 1937, the S&P 500 returned an average 9.2% during midterm years, according to J.P. Morgan Asset Management.
Rather than trying to predict every turn in the road, though, take the opportunity to ensure "your risk and return objectives are properly calibrated during the summer preceding the midterm election," says First Horizon Wealth Management Chief Investment Officer Eric Teal.
Review whether your goals, time horizon, risk tolerance and upcoming cash needs have changed. Then check whether your current portfolio mix is still aligned with those priorities.
2. Rebalance investments that have drifted
Staying the course doesn't mean ignoring your portfolio. Market performance over recent years may have pushed your investments away from your chosen target weights. Volatility can be an opportunity to bring them back into balance.
"If and when markets sell off, investors have a chance to reevaluate their strategy and determine whether the prevailing lower prices offer a good opportunity to increase exposure to a now-cheaper asset class," Norton says.
Rebalancing means trimming investments that have become overweight and using the proceeds to buy those that have become underweight. It doesn't always require selling. You can achieve the same effect by simply investing new cash into your underweight areas.
Rebalancing can be a smart way to scratch the "itch" to take action around election time, Crowell says. It ensures any trades you make support your long-term goals, rather than reflect short-term election noise.
3. Build resilience through diversification
Midterm elections aren't the only potential source of market turbulence. The weakest midterm-year markets also coincided with other major forces, such as Federal Reserve rate hikes and the bursting of the dot-com bubble, as J.P. Morgan Asset Management found.
Uncertainty around inflation, geopolitics and the future of the AI boom could also make for a bumpier ride this year.
Instead of trying to predict which risk will rattle the markets first, make sure your portfolio isn't dependent on a single outcome. "Diversification across asset classes, including fixed income, along with sector diversification, can play a valuable role," Norton says.
Check under your portfolio's hood to see how diversified you really are. Compare the largest holdings and sector weights. Exchange-traded funds (ETFs) and mutual funds can hold many of the same stocks or sectors and leave you more concentrated than you may realize.
Depending on your goals, diversification can include owning companies of different sizes, geographies, investment styles and asset classes, including bonds.
"In a world fretting about inflation, it's tempting for investors to lose faith in bonds," Norton says. "However, yields now price in far higher inflation, growth, and rate expectations, offering investors better cushion for potential equity market drawdowns, particularly if those drawdowns are fueled by AI concerns."
Bonds and diversification can't prevent losses, but they can help mitigate them and smooth your overall investing journey.
Different sectors also tend to hold up better than others during midterm years. As BlackRock notes, since 1990, healthcare stocks and energy stocks delivered stronger average returns, while industrial stocks and financial stocks have lagged.
That doesn't mean you should make election-based sector bets. The stronger sectors may not continue to outperform. But it does reinforce why diversified exposure across sectors matters.
4. Stay invested and focus on fundamentals
Sometimes the best move is to make no move at all. The trouble with trying to time the market around election cycles is that you need to be right twice: when to get out and when to get back in.
This is further complicated by the fact that the best days in the market often occur close to the weakest ones. According to Vanguard, $100,000 invested in the S&P 500 for the entire period from 1988 through 2024 would have grown to $4.9 million. Missing only the 10 best days cuts the ending value in half to $2.3 million.
"Markets ultimately follow fundamentals, not geopolitics," says Scott Helfstein, head of investment strategy at Global X ETFs. Corporate performance has remained strong, he says, with markets driven more by earnings expectations than political sentiment.
Elections are not irrelevant, though. Changes in tax, regulatory and/or trade policy can affect company earnings and valuations. But moves based on evaluations of those effects are different from selling based on predictions of who will win at ballot boxes.
The time to consider whether to de-risk your portfolio is if and when fundamentals deteriorate, or an asset no longer fits your financial plan, not because political headlines make you nervous.
5. Set rules for how you respond to sell-offs
Athletes know preparation is as much mental as physical. Investing is similar: It's easy to promise yourself that you'll keep your head when the markets make others lose theirs.
Following through on that promise can be another matter when you see your account balances tumble, and every headline seems to predict a worse outcome.
The best way to handle it is with a predetermined plan. Write down both the trigger and response before volatility arrives and the market's "fear index" spikes.
That might involve rebalancing when your allocation crosses a certain threshold, dollar-cost averaging into specific investments or continuing automatic contributions regardless of what the market does.
If election-season volatility does produce a significant decline, Teal says investors can "consider rebalancing and redeploying cash for the eventual rebound and recovery."
That doesn't mean you should start hoarding cash now in the hopes of timing the bottom. But it can mean having a plan for how you'll invest cash that's already earmarked for long-term investing.
You should also specify what you won't do, such as selling solely because of polling results or a sudden sell-off.
The key to surviving midterm season with your portfolio intact is to remember that "the objective is not to try to 'win' the election trade," Crowell says. "The objective is to achieve one's long-term financial goals."
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